In accounting, information has confirmatory value when it helps users to confirm or adjust prior expectations. But why is confirmatory value an important attribute for accounting information to have?
The importance of confirmatory value
People read accounting financial statements in order to create predictions about the future. They want to predict future dividends and that the company will be able to make interest and principal payments. To make these predictions, they often make predictions about future net income. The value of information in making predictions is called predictive value. This information can then be used to make investment decisions. If you predict that a company’s income will rise significantly in the future, then perhaps it is a good investment. Similarly, if you predict that a company won’t be able to pay interest on its bonds next year, then you probably should not invest in its bonds.
Understanding confirmatory value
Here is an analogy. How does a marksman learn to hit a target? With practice. Take a shot. How close to the bulls eye did you get? Take another. Was that better? And another. A good marksman will need many many hours of practice to learn how to shoot.
The same goes for financial analysts. A financial analyst is constantly making predictions, and then – after the fact – gauging their accuracy. Make a prediction. Then see what happened. Make another prediction. How close to the bulls eye did you get? Try again, and again. Confirmatory value is the value of information to gauge how accurate your predictions are – so that you can make more accurate decisions in the future.
Making business decisions
After you make a business decision, follow up a few weeks later to see what happened. Was it a good decision? An error? Did you hit your target? What could you do next time to make a smarter decision?