Application of prudence in fnancial reporting – a habit or necessity?

Authors

  • Ката Шкарић Јовановић Faculty of Economics, University of Belgrade

DOI:

https://doi.org/10.7251/ACE1522063S

Keywords:

prudence, neutrality, financial reporting, qualitative characteristics, unconditional conservatism, conditional conservatism, IAS/IFRS, Conceptual Framework for Financial Reporting

Abstract

For many centuries financial reporting has been rightfully labeled as conservative. The principle of prudence whose application generates conservatism, which is characterized by time asymmetry in the recognition of gains and losses, is not only one of the oldest but also one of the most in?uential rules in financial reporting. Determining the investors, creditors and other lenders as primary users of financial statements has led to the fact that in the Conceptual Framework for Financial Reporting the neutral presentation of financial statements has the absolute precedence over prudence, which is marked as undesirable. Numerous empirical studies largely caused by such a radical change have shown that the benefits of application of conservatism in financial reporting and in the present circumstances are such that they greatly surpass its weaknesses. On the other hand, neutrality can be achieved in the presentation of certain positions in financial statements but not under the existing circumstances and financial statements in general.

Substituting prudence with neutrality violates consistency, which is necessary between the Conceptual Framework for Financial Reporting and IAS/IFRS. Many of IAS/IFRS contain requests for recognition and validation that are based on the prudence. Meeting these requests will inevitably lead to conservatism in the presentation of financial statements.

Since IAS/IFRS are built on a mixed basis consisting of the historical cost concept, which is tightly linked with prudence, and fair value concept, which is linked with neutrality, then it is quite reasonable to expect both neutrally and conservatively presented information in the presentation of financial statements. By restoring prudence in the Conceptual Framework for Financial Reporting, besides eliminating inconsistence that exists between it as a basis for revising existing and adopting new standards, contribution of conservatism to protecting the interests of creditors and investors would be confirmed.

Downloads

Download data is not yet available.

References

Ball, R. & Shivakumar, L. (2005). The role of accruals in asymmetrically timely gain and loss recognition, ???????? 15.1.2015. sa SSRN: http://ssrn.com/abstract=871092 or http://dx.doi.org/10.2139/ssrn.871092
Ball, R., Kothari, S.P. & Nikolaev, V. (2011). On Estimating Conditional Conservatism, http://ssrn.com/abstract=1758702, ???????? 8.1.2015.
Bassu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24 (1), 3-37. ?. 4
Beaver, W.H. & Ryan, S.G. (2005). Conditional and Unconditional Conservatism: Concepts and Modelling. Review of Accounting Studies, 10, p. 302
Bliss, J. H. (1924). Management through accounts. New York, NY: The Ronald Press Co
Burlaud, A. (2014). Should Financial Statements Represent Fairly or be Relevant? Considering the IASC/IASB Conceptual Framework, ?. 15
Garcia L. & Mora, A. (2004). Balance sheet versus earnings conservatism in Europe. European Accounting Review, 13, p. 261-292
Garcia, B., Garcia, J.M. & Penavla, F. (2010). The E?ect of Earnings Management on the Asymmetric Timeliness of Earnings. European Accounting Review, Vol. 13, No. 2, pp. 261-292, 2004
Dichev, I.D. & Ross, S. M. (2008). Matching and the changing properties of accounting earnings over the last 40 years. The Accounting Review, 2008 - aaajournals.org
Embring, H. & Wall, J. (2012). Accounting Conservatism in Sweden The e?ect of the IFRS adoption on conservatism in Swedish accounting, www.diva-portal.org/smash/.../FULLTEXT01.pd
IASB. ???????????? ????? ?? ??????????? ???????????, http://mfn.gov.rs/UserFiles/File/MRS/2014/Konceptualni%20okvir.pdf
Irwin, R., Homewood, IL., Penman, S. H. & Zhang, X. J. (2002). Accounting conservatism, the quality of earnings, and stock returns. Accounting Review 77, No. 2.
Kothari, S.P., Ramanna, K. & Skinner, D. J. (2010). Implications for GAAP from an Analysis of Positive Research in Accounting http://ssrn.com/abstract=1413775
Parthasarathy, K. (2014). The Joint E?ects of Monitoring and Incentive Alignment on Accounting Conservatism. Accounting and Finance Research Vol. 3, No. 4; p. 60.
Paton, Stevenson, (1920). Principles of Accounting, New York: The Macmillan Company.
Penman, S. H. & X.-J. (2002). Accounting Conservatism, the Quality of Earnings, and Stock Returns. Accounting Review 77, No. 2,
Penndorf, B. (1930). The relation of taxation to the history of the balance sheet. The Accounting Review , September: 243-251.
Piot, C.P., Dumontier (2011). IFRS consequences on accounting conservatism within ?urope: The role of Big 4 auditors, ?. 37 http://ssrn.com/abstract=1754504
Pope, P. i Walker, M. (1999). International Di?erences in the Timeliness, Conservatism and Classifcation of Earnings. Available at SSRN: http://ssrn.com/abstract=185308 or http://dx.doi.org/10.2139/ssrn.185308
Pope, P. i Walker, M. (2003). Ex- ante and ex-post accounting conservatism, asset recognistion and asymmetric earning timeliness, Working Paper, Lancaster University and University of Manchester UK, http://feb.kuleuven.be/eng/tew/academic/af/pdfs/Conservatism%20%20Credit%20Ratings%2022.pdf, ?. 2.
Statement of Financial Accounting Concepts No.2, 1980, paragraph 95. london.edu/xli.../Li%202010%20WP.pdf, ?????? ? ???????? (Ordonnance pour le Commerce) https://books.google.rs/books?id
Hellman, N. (2008). Accounting Conservatism under IFRS. Accounting in Europe. Vol 5. N0. 2, 71-100.
Hendriksen, E. S. (1982). Accounting Theory. 4th edition
Huijgen, C. & Lubberin, ?. (2003). Earnings Conservatism, Litigation, and Contracting: the Case of Cross-Listed Firms. Journal of Business Finance & Accounting, 32,
1275-1309.
Christensen, J. & Demski, ?. S. (2006). The Non-Neutrality of Reporting Standards https://server1.tepper.cmu.edu/seminars/docs/Christensen_paper2.pdf
?????? ????????? ?. (2014). ?????? ????????? ???????????? ??????????? ? ???????? ??????? ?? ?????? ??????????. ? ?????? ??????????? ?????????? ? ????????????? ?????????: ????? ? ????? ?????? ? ?????????? ???????? (???. 203-220). ???? ???????: ????? ?????????? ? ???????? ????????? ??????.
Wang. J.L. (2013). Accounting Conservatism and Information Asymmetr?: Evidence from Taiw, International Business Research. Vol 6, No. 7.
Watts, R. (2003). Conservatism in Accounting, Part I: Explanations and Implications, Accounting Horizons, Vol. 17, No. 3. pp. 207-221.
Whittington, G. (2010). Measurement in Financial Reporting. ABACUS, Vol. 46, No. 1. Xi Li. (2010). Accounting conservatism and the cost of capital: international analysis, phd.london.edu/xli.../Li%202010%20WP.pdf ???????? 6.1. 2014.

Downloads

Published

2015-02-28

How to Cite

Шкарић Јовановић, К. (2015). Application of prudence in fnancial reporting – a habit or necessity?. Acta Economica, 13(22), 63–82. https://doi.org/10.7251/ACE1522063S

Issue

Section

Preliminary Communication