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Analysis of Contemporary Issues

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Added on  2021-06-17

Analysis of Contemporary Issues

   Added on 2021-06-17

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Analysis of Contemporary IssuesStudent Name:Student ID:Subject Name: Accounting Theory & Contemporary IssuesSubject Code: ACC301Date Due:Professor Name:Page | 1
Analysis of Contemporary Issues_1
1. a) In your own words, explain what you understand by the term ‘prudence’. How can an‘asymmetrically prudent’ accounting treatment lead to the understatement of income inone period but an overstatement in future periods?Prudence in accounting and financial reporting as per the IASB framework has clearapplicability. The concept of prudence follows dictionary definition, which states to be wise,careful and conscious while reporting of financial statements (Cooper, 2015). Managers whenapplying these decision statements will either be overstating or understating its assets. It is anintegral conceptual framework that should be accommodated as key global standards. Prudenceallows a framework for including qualitative characteristics to include reliability. Prudence isintegral that needs to be included within standards. Prudence needs to be applied whileexercising standards as well. IFRS framework allows exposition of prudence with appropriatecaution. Prudence is regarded both as application and standard setting allows better defining offinancial crisis. In case of asymmetrical prudent accounting statement can lead to understatement of income inone period of time, whereas overstatement in future period of time (Danjou, 2013). This type offinancial reporting leads to charging assets on one side of the balance sheet and including alllong term as well as short period liability on the other. Assets are generally recognized athistorical costs and increased values are not recognised until an asset is sold. Measuring of assetsand liabilities by means of cash flows or fair value models, additional discount rates for liquidityand risks is undertaken. Page | 2
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