ACC301: Analysis of Prudence in Accounting and Financial Reporting

This assignment delves into the concept of prudence in accounting and financial reporting, as defined by the IASB framework. It explores the meaning of prudence, its application, and the implications of 'asymmetrically prudent' accounting treatments, particularly how they can lead to income understatement in one period and overstatement in subsequent periods. The assignment further examines the decision to reintroduce explicit references to prudence, discussing arguments for and against this approach, referencing literature on conservatism and the IASB's conceptual framework. The analysis covers the challenges faced by the IASB, the role of fair value calculations, and the importance of prudence in standard setting and its impact on financial reporting practices. The paper includes a detailed discussion of the framework and the application of prudence in the context of IFRS.

Analysis of Contemporary Issues
Student Name: Student ID:
Subject Name: Accounting Theory & Contemporary Issues
Subject Code: ACC301
Date Due: Professor Name:
Page | 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 in
one period but an overstatement in future periods?
Prudence in accounting and financial reporting as per the IASB framework has clear
applicability. The concept of prudence follows dictionary definition, which states to be wise,
careful and conscious while reporting of financial statements (Cooper, 2015). Managers when
applying these decision statements will either be overstating or understating its assets. It is an
integral conceptual framework that should be accommodated as key global standards. Prudence
allows a framework for including qualitative characteristics to include reliability. Prudence is
integral that needs to be included within standards. Prudence needs to be applied while
exercising standards as well. IFRS framework allows exposition of prudence with appropriate
caution. Prudence is regarded both as application and standard setting allows better defining of
financial crisis.
In case of asymmetrical prudent accounting statement can lead to understatement of income in
one period of time, whereas overstatement in future period of time (Danjou, 2013). This type of
financial reporting leads to charging assets on one side of the balance sheet and including all
long term as well as short period liability on the other. Assets are generally recognized at
historical costs and increased values are not recognised until an asset is sold. Measuring of assets
and liabilities by means of cash flows or fair value models, additional discount rates for liquidity
and risks is undertaken.
Page | 2

b) Do you agree with the board’s decision to reintroduce an explicit reference to the notion
of prudence (described as caution when making judgments under conditions of
uncertainty)?
Justify your answer.
IASB published a revised Conceptual Framework for the purpose of Financial Reporting in
support of prudence (Nobes, 2015). Removal of explicit references to prudence in the 2010
Framework was seen as by many accountants as an imprudent measure as it would imply
measuring everything at fair value. Fair value calculations will be included for profits whether
unrealized or realized in income. Some accountants however found removal of the concept as a
good measure that would discourage irrelevant practices in accounting. There have been many
challenges due to which the IASB decided on excluding prudence in accounting (Barker, 2015).
Many recognize that such standards could mean unfortunate reporting arising within financial
reporting. Removal of prudence was seen as an endeavor to develop concepts in a joint manner
such that better IASB framework could be implemented.
There is present various agreement for and against reasonability in accounting models, they
essentially center on the pressure amongst client need that budgetary data have to be a
dependable record for execution them and their requirement need to be fair. There are multiple
cases of reasonability in current IFRS. This exchange along with definition has to be re-analysed
of prudence as ostensibly the key part for judiciousness in standard setting encompassed in
powerful acknowledgment criteria for resources and liabilities, where its application is
straightforward. In estimating terms of the maintenance for recorded cost for numerous things
that an appropriate level of reasonability to benefit acknowledgment and to resource esteems.
Page | 3

Reference Lists
Barker, R., 2015. Conservatism, prudence and the IASB's conceptual framework. Accounting
and Business Research, 45(4), pp.514-538.
Cooper, S., 2015. A tale of ‘prudence’. Investor Perspectives, IFRS.
Danjou, P., 2013. An Update on International Financial Reporting Standards (IFRSs).
Nobes, C., 2015. IFRS ten years on: Has the IASB imposed extensive use of fair value? Has the
EU learnt to love IFRS? And does the use of fair value make IFRS illegal in the
EU?. Accounting in Europe, 12(2), pp.153-170.
Page | 4