Prudence in Accounting: A Case Study of Contemporary Issues

This case study examines the contemporary issue of prudence in accounting, focusing on the debate surrounding its role in financial reporting. The assignment analyzes the International Accounting Standards Board's (IASB) decision to replace prudence with neutrality in its conceptual framework, exploring the arguments for and against this change. The study delves into the pre-2010 definition of prudence, which emphasized caution and the avoidance of bias in financial estimates under uncertainty. The author discusses the UK Financial Reporting Council's (FRC) suggestions for reconsidering the IASB's framework and the implications of removing asymmetric prudence. The paper further explores the IASB's reasons for removing asymmetric prudence, including its integration into existing standards and the concept of faithful representation. The case study aims to provide a comprehensive understanding of the complexities of prudence in accounting and its impact on financial reporting practices, offering insights for investors and entities alike.

Running head: PRUDENCE- CONTEMPORARY ISSUE IN ACCOUNTING
Prudence- Contemporary Issue in Accounting
Name of the Student
Name of the University
Author Note

1PRUDENCE- CONTEMPORARY ISSUE IN ACCOUNTING
Table of Contents
Answer: 1.......................................................................................................................2
Answer: 2.......................................................................................................................2
Answer: 3.......................................................................................................................3
Reference........................................................................................................................4

2PRUDENCE- CONTEMPORARY ISSUE IN ACCOUNTING
Answer: 1
The concept of Prudence and its presence or absence in the accounting is a most
debatable issue raised these years. As Prudence consists in the framework of financial
reporting since from long time that stands for making better decisions and to avoid biasness
(Oreshkova 2017). In September 2010, IASB has taken decision to revise the first chapters of
Conceptual Framework that results in replacing ‘Prudence’ with ‘Neutrality’ that is
considered as qualitative nature.
The certain new concept need not to be included in such standards or frameworks.
Because, the concept for the good financial reporting is already mentioned in the frameworks.
In my opinion, Prudence must be seen as a major requirement for the report but qualitative
feature should not be added (Wagenhofer 2015). It can be seen as the fundamental and core
principle that provides a proper guidance. It must be a key principle that has already attached
analytical and conservative that is doubtful than confident people.
Answer: 2
The updated framework by IASB has been argued by The UK Financial Reporting
Council (FRC) and has suggested for reconsidering it. In the new concept, IASB has
somehow lack of considerance from the basic. As earlier, the concept is highly focused on
recognizing the losses of the company rather than the profits. Investors or the user needs the
reports so that they can assess the current position and their creation for the value to the
shareholders on long-term basis (Barker 2015). Asymmetric prudence has been dismissed due
to the specific proposals in the Exposure Draft that also relates to neutrality. As per IASB
neutral accounting does not need to spot all the assets or liabilities or the overall value of an
entity, not imposed any compulsion on the measurement and not exclude loss of assets

3PRUDENCE- CONTEMPORARY ISSUE IN ACCOUNTING
measured at cost. Somehow, it is not easy to understand to a normal context. Therefore, the
prudence concept with the asymmetric should be reintroduced to eliminate ambiguity.
Answer: 3
The IASB has considered two reasons that asymmetric is not necessary characteristics
of information so that it could be remove from the conceptual framework and further it can be
used on an exceptional basis.
The idea of Asymmetric prudence has inserted by the IASB in the existing standards.
For example that can be seen in the standards only; as per IAS 11 Construction contracts, the
expected loss is to be immediately recognized as an expense. The entities discloses their
contingent assets and liabilities as per IAS 37 that needs some disclosures in some particular
situations. IFRS 13 Fair Value Measurement needs disclosures on assumptions, procedures of
valuation as well as entity’s inputs (Whittington 2014). The so-called qualitative
characteristics includes by replacement of reliability with faithful representation in the
stewards. As this consists of the feature of completeness to the some extent.
However, in some accounting standards if the IASB expects to use asymmetric
prudence some guidance must be provided in the Conceptual framework. So that this can
eliminate the created ambiguities, as well as unnecessary formulation in the already existing
standards, provide a proper framework that will be easy to understand and be in the benefit of
the investor as well as the entity.

4PRUDENCE- CONTEMPORARY ISSUE IN ACCOUNTING
Reference
Barker, R., 2015. Conservatism, prudence and the IASB's conceptual framework. Accounting
and Business Research, 45(4), pp.514-538.
Oreshkova, H., 2017, September. The Debate On Prudence In Accounting. In CBU
International Conference Proceedings (Vol. 5, pp. 343-360).
Wagenhofer, A., 2015. Commentary on: Asymmetric reporting. Journal of Financial
Reporting, 1(1), pp.33-35.
Whittington, G., 2014. Fair value and the IASB/FASB conceptual framework project: an
alternative view. In Accounting and Regulation (pp. 229-268). Springer, New York, NY.