FINANCIAL ACCOUNTING ASSIGNMENT 2022

FINANCIAL ACCOUNTING 1
FINANCIAL
ACCOUNTING

FINANCIAL ACCOUNTING 2
Reason IASB removed the concept of prudence in 2010:
The part of the old definition of prudence is the fact that it concentrates more on the uncertain
estimates. The people that prepare the financial statements do not have the way through
which they can understand and know the uncertainties. An example of which is the
collectability of the receivables, the useful life of the plant and the equipment is another
example. These are the uncertainties which are reported keeping in mind the nature and the
extent and to which prudence is exercised on them. Prudence was defined as something
which would include a great degree of caution when it comes to the exercising of the
judgments that are required to make the estimations that are required under the conditions of
uncertainty. This was the definition on IASB was working upon for change. This definition
did not go well for many people since they thought that this definition went towards the
understanding of the net assets. This definition further includes that such are the assets and
the income that are not overstated and the liabilities or the expenses are not understated. This
is something that the prudence would not allow. An example of this includes the creation of
the hidden reserves or some excessive provisions along with the understatement of the assets
and the income. The financial statements will have to be neutral and this would not impact
the quality of the reliability ("News Details - Opinion: Is prudence still a virtue?", 2019).
Then comes the part wherein the prudence was reintroduced by IASB. This new definition
left a room for debate in the minds of the people that were reading this passage and they also
stated that the overstatement of the assets and the profits was something which was being
emphasised upon. From this it is very much clear that the old picture pf prudence was not
clear in the eyes of the people and that there were different views about the implications of
prudence in the financial reporting ("A tale of ‘prudence’", 2015).
The new conceptual framework of accounting which was introduced in the era 2000, went on
to eliminate the differences which existed between the interpretations and also delete the
references to this concept altogether and also tried to describe the ways in which the good
quality financial reporting could be described. Keeping this in mind, the IASB went on to
redefine prudence. This was mainly done to overcome the controversy of “if accounts are
prudent then they must be imprudent”.
Concept introduced: