The joint IASB/ FASB Framework (Section 3.7) will have significant effects on financial reporting as it is implemented.

a. The Framework drops the word “rational” as a description of investor and creditor decision making. This description appeared in the original 1978 FASB Statement of Financial Accounting Concepts. Instead, in the joint Framework, the objective of financial reporting is to help financial statement users “in making decisions in their capacity as capital providers.” Why do you think the word “rational” has been dropped?
b. If investors do not make rational decisions, does this increase or decrease the role of financial reporting in providing useful information to investors? Explain.
c. The joint Framework also states that financial statement users need information about “future cash flows” from their investments. Thus, some linkage between current financial statement information and future cash flows is needed. The concept of an information system provides such a linkage.
What are the effects of relevance and reliability of financial information on the main diagonal probabilities of the information system? Why do these desirable qualities have to be traded off when conditions are no ideal? Define “relevance” and “reliability” as part of your answer

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