Inclusion or Exclusion of Prudence Concept in Conceptual Framework and IFRS

Introduction
Prudence is regarded as an important qualitative characteristic that was removed from
the conceptual accounting framework in the year 2010 (Măciucă, 2015). The principle of
prudence refers to the exercise of caution during making decisions under the conditions of
uncertainty. The prudence concept is restricting the assets and income to be overstated and
liabilities to understate. As such, it leads to promoting conservatism in accounting as per
which the financial statements should disclose conservative information by depicting the
revenue only when it is actually realizes. IASB is presently emphasizing on including
prudence again in the conceptual accounting framework for overcoming the issues of
misrepresentation of financial information. There has been debate regarding advantages and
disadvantages of including the principle of prudence in conceptual framework and IFRS. The
debate is centered on including or excluding the principle of prudence as it is perceived to
have both positive and negative impact on the financial reporting process (Soderstrom, 2007).
It has faced support and criticism from accounting experts regarding its inclusion in the
conceptual accounting framework. In this context, the present essay presents a critical
analysis regarding the inclusion or exclusion of prudence concept from the conceptual
framework and the IFRS.
Critical analysis of inclusion of prudence concept in the conceptual framework and
IFRS
According to Măciucă (2015), the conceptual framework of financial reporting has
developed the concepts that the basis to draft the financial statements. The major qualitative
characteristics stated by the conceptual framework of accounting are understandability,
verifiability, timeliness and comparability. IASB is presently emphasizing on including
prudence again in the conceptual accounting framework for overcoming the issues of
misrepresentation of financial information. This is mainly done for improving the quality of
financial information disclosed by business entities for protecting the interests of the
stakeholders. In this context, IASB has developed and established the conceptual framework
of accounting that has provided the qualitative characteristics that need to be followed by
business entities complying with IFRS. This is done for delivering quality financial
information to the end-users of the financial reports such as investors, lenders, creditors,
suppliers and others. Its re-introduction is receiving both support and criticism from

accounting experts and therefore it is impotent to analyze both the arguments cited in this
context for developing a consensus view regarding the introduction of this concept.
It has been stated by ACCA (2014) that IASB is emphasizing again to re-include
prudence in the financial reporting process for improving the quality of financial information
disclosed. The imprudent account as per various accounting experts by exclusion of prudence
concept would allow measuring everything at fair value. This means that all profits whether
they are realized or unrealized would be recognized as income in the financial statement. This
can result in manipulating the financial information presented and thus negatively impacting
the interest of the stakeholders as that occurred during the financial crisis. The use of fair
value accounting is regarded to be the main reason for the occurrence of the global financial
crisis. The inclusion on unrealized revenue in the financial statements supported the leading
organizations such as Enron and WorldCom to deceive the interests by overstating their
profitability position. As such, various accounting experts are in support of including
prudence again in the conceptual accounting framework to overcome the increasing cases of
corporate scandals (ACCA, 2014). The inclusion of prudence would cause the business
organizations to only report the released revenues and thus helpful in protecting the interest
of the investors (ACCA, 2014).
On the other hand, according to Malley (2014) has the prudence concept was removed
by the IASB form the conceptual framework as it was stated to act against the neutrality and
faithful representation of financial information. The faithful presentation of financial
reporting states that the information disclosed must be neutral and error-free (Oreshkova,
2017). However, the presence of prudence was believed to be inconsistent with neutrality as
it directs the business entities to record a probable expenses transaction or liability and such
may fail to represent the true value of economic substance. The various accounting experts
still are in against the inclusion of prudence in the IFRS standards as it is believed to
contradict the faithful presentation of financial information. The delay caused in recognition
of profits that are to be realized in future and recording the probable expenses in a current
accounting period may results in presenting biased financial information to the users. This is
responsible or the criticism received by various accounting exerts on including it again in the
conceptual framework of accounting (Malley, 2014).
However, Deller (2017) stated that the inclusion of prudence principle again in the
IFRS and the conceptual framework can be regarded as necessary for ensuring the protection