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Prudence and Conservatism - The Difference and the Effect on the Usefulness of Accounting Information

The purpose of this article is to explore if the proposed changes in conceptual framework for financial reporting of IASB related to one of the accounting concepts, the concept of prudence, are supported by academic research. Conceptual framework, now under revision expected to finish in 2017, explains fundamental concepts upon which accounting standards should be built. The current revised version of Conceptual framework from 2010 excluded the concept of prudence, something that was present in the first version of Conceptual framework from 1989. The reason for exclusion was the emphasis on neutrality as a characteristic of useful financial information which for many seemed to be in conflict with prudence. Concept of prudence is now being reintroduced in Conceptual framework with the explanation that there is distinction between ‘cautious prudence’ and ‘asymmetric prudence’, the former being what is meant under prudence in new conceptual framework, the later meaning asymmetric or biased treatment of gains and losses or conservatism. This paper reviews existing analytical and empirical literature on accounting conservatism to explore the arguments that ‘asymmetric prudence’ should also be more emphasized when usefulness of accounting information is considered.

IFRS Conceptual framework, accounting standards, prudence, conservatism

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