Financial Accounting Report: IASB's Conceptual Framework and Prudence

This report analyzes the evolution of the prudence concept within the IASB's conceptual framework for financial reporting. It begins by explaining the initial removal of prudence in 2010, focusing on the uncertainties in financial estimates and the potential for biased reporting, such as hidden reserves. The reintroduction of prudence is then discussed, highlighting the debate surrounding its interpretation and its role in influencing the quality of financial statements. The report further explores the shift towards a more developed accounting framework and the alignment of prudence with capital maintenance and investor decision-making. It references key documents and publications, including the conceptual framework and articles from ACCA Global and IFAC, to provide a comprehensive overview of the IASB's perspective on prudence and its significance in ensuring the reliability and neutrality of financial information. The report concludes by emphasizing the importance of open-mindedness and strategic thinking among accountants in preparing financial statements.

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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:

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Prudence refers to the exercising of the good judgment, which is informed by intelligence and
good character. This requires the use of consideration of the long term choices and the
implications of the decisions and also seeks to avid the biases that makes to the focus on here
and now ("The Never Ending Story of Prudence and IFRS | IFAC", 2019).
Prudence leads to bias in the financials by the way of introduction of the degree of the
conservatism which deflects from the presentation of the financial reports that are not biased.
There is no doubt in the fact that the concept of prudence and conservatism is more important
concept at the time when the standards on accountants did not develop and when the
frameworks were less developed. This was done in order to encourage the exercising of the
caution by the preparers that prepare the financial report and when there was no clear
guidance to tackle any issue pertaining with the financial reporting.
But with the recent times, the accounting standards and the frameworks have become more
developed and hence there was a need to develop and amend this concept further. The
support for this new concept is more string wherein the function of financial reporting is
being linked with the capital maintenance concept and the protection of the creditors. The
IFRS worked with the IASB and the main focus was on the providing of the information
connected with the financial performance that would allow the investors to make the apt
decisions (https://www.accaglobal.com, 2019).
The reason for its reintroduction was the fact that the preparing of the financial statements
requires an immense amount of open mindedness in the minds of the accountants. They are
required to perceive the possibilities as the strategic thinkers and also as the creators and the
assurers of the information.

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References:
A tale of ‘prudence’. (2015). Retrieved 8 October 2019, from http://archive.ifrs.org/Investor-
resources/Investor-perspectives-2/Documents/Prudence_Investor-
Perspective_Conceptual-FW.PDF
https://www.accaglobal.com, A. (2019). IASB restructures its Conceptual Framework |
ACCA Global. Retrieved 8 October 2019, from
https://www.accaglobal.com/in/en/member/discover/cpd-articles/corporate-reporting/
deller-mar17.html
News Details - Opinion: Is prudence still a virtue?. (2019). Retrieved 8 October 2019, from
http://www.theaccountant-online.com/news/is-prudence-still-a-virtue-4276220/
The Never Ending Story of Prudence and IFRS | IFAC. (2019). Retrieved 8 October 2019,
from https://www.ifac.org/knowledge-gateway/business-reporting/discussion/never-
ending-story-prudence-and-ifrs