Arguments for and against the inclusion of prudence in the conceptual framework

Running head: FINANCIAL ACCOUNTING AND REPORTING
Financial Accounting and Reporting
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1FINANCIAL ACCOUNTING AND REPORTING
Introduction:
Over the past decade, the European nations have encountered significant financial
reporting changes. There has been considerable debate whether “International Financial
Reporting Standards (IFRS)”, as the significant international standards, need to include prudence
and its significance in the conceptual framework. However, prudence has been eliminated after
the global financial crisis as a part of the conceptual framework introduced in 2010. Prior to that
period, prudence has been included in the framework of IASB in the description of the
qualitative characteristics of reliability (Accaglobal.com, 2018). However, in 2015, the prudence
concept has been reinitiated in 2015, which has further aggravated the debate. Therefore, the
current paper aims to discuss the arguments for and arguments against the inclusion of prudence
in the conceptual framework.
Arguments for and against the inclusion of prudence in the conceptual framework:
Arguments for the inclusion of prudence in the conceptual framework:
The arguments in favour of the prudence theory are seen among various types of the
users (accountants) who should be restrained on anticipated increased exuberance in the results
of an entity. This is further depicted to be closely attached to the expectation of both audited and
reported figures which are difficult to be ascertained for certainty and need to be exercised with
caution. This is identified to be exercised as per referring to former framework of the accounting
standards and supporting the viewpoints of the same. This view is not only depicted to be opined
by the public but also by the professional investors those which are particularly linked with
paying the bonuses and dividends (Tracey, 2015).

2FINANCIAL ACCOUNTING AND REPORTING
This is identified as the area in which the assets and profits are seen to be overstated as
per the various types of the considerations which are understood with accounting standards,
accounts, accountants and criticisms. The asymmetrical risk aspect has further led to addressing
the significant problems of GFC 2008/9. The benefits of this are further identified with the
application of the standards which are widely agreed upon. For instance, IASB chairperson has
defined prudence in terms of former framework of IASB as sheer common sense (Watts and
Zuo, 2016).
The different types of the arguments which are against the concerns of prudence needs to
be identified with comparability and neutrality which are having a specific impact on the
financial statements. The different types of the professional investors such as CFA desire the
management to report the actual results to be revealed in a more transparent manner which is not
biased to both bad and good news. In addition to this, there are several types of the uncertainties
arising as a result of the disclosures made by the management. At the time of evaluating the
challenges such as desirability and restraint in profit recognition after pointing out the prudence
concerns, which held back the profits showing exaggerated results (Sutton, Cordery and Van
Zijl, 2015). The restatements of Daimler Benz’s have shown several types of the profit records
which were prudent from the German accounting to other accounting standards such as US
GAAP. The overall depictions of the results revealed that the there is significant smoothing
effect in terms of prudence. The Spanish banks are further depicted to be having a dynamic
effect on defining the provision at the time of the crisis and this can be cited as the underlying
weakness with the changing conditions (Zhang and Andrew, 2014).
Arguments against the inclusion of prudence in the conceptual framework: