This it’s collected. At the same time, even

 

 

This essay will be about the role and history of prudence in
the preparation, of financial statements, why prudence is regarded a
qualitative characteristic of financial information and how it enhances the
usefulness of information provided to various users to help them in their
decision making.

 

The qualitative characteristics of financial statements mean
that the information in financial statements is useful for the users of this
information. The qualitative characteristics in accounting are relevance,
reliability, comparability and understandability. Prudence is under the reliability
where the information should be reliable in order to be useful. If the
information is neutral, free from material error, complete and has faithfully
representation, it will be reliable. It’s going to be discussed that whether
the prudence is a complement of these qualitative characteristics or not.

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In recent years, prudence in accounting and financial
reporting is discussed between accountants in terms of being whether it should
be considered as a desirable quality of financial reporting or not. The meaning
of prudence in accounting is where a firm, company should be careful because of
the risks and uncertainty. For example, if a product or service is sold, its revenue
should not be recorded before it’s collected. At the same time, even a loss
doesn’t become definite, they should make provision for it. Similarly, Richard
Barker said “Accounting is prudent if, as a result of a higher threshold of
verifiability for the recognition of economic gains than economic losses, the
economic value of an entity’s equity exceeds its book value.”

 

When we look at the history of prudence, we see that there
was a clear reference on prudence in 1989’s framework, yet, they didn’t include
a clear reference to prudence in 2010’s Conceptual Framework which “describes
the objective of and concepts for general purpose financial reporting. It deals
with issues such as the definitions and measurement of assets and liabilities
and when and how income and expenses should be recognised and presented.”
Finally, a clear reference on prudence was reintroduced in “Exposure Draft” in
2015 after the stakeholders and some investors wanted to see prudence in
accounting standards. It is worth noting that ‘Exposure Draft’ involves the new
accounting standards made for public commentary.

 

Firstly, I believe that prudence should be considered as a
qualitative characteristic. The role of prudence is that it avoids overstating
assets and income and avoids understating liabilities and expenses by including
the degree of caution in accounting judgements when there is uncertainty. This
is stated in the IASB (International Accounting Standards Board)’s framework
when discussing the qualitative characteristic of reliability. Thus, this makes
prudence an essential part of accounting and more specifically qualitative
characteristics. In other words, it is a qualitative characteristic according
to the framework and prudence should be used when including information in financial
statements.

 

However, it is also about how prudence is used. If it makes
financial statements biased, this contradicts with the quality of reliability,
therefore, it can’t be considered as a qualitative characteristic. For example,
under the concept of prudence, the hidden reserves or excessive provisions
can’t be created. Moreover, if there are assets and income that are understated
consciously, prudence would not be a qualitative characteristic anymore. This
is same for liabilities and expenses that are overstated consciously.

Additionally, not all conceptual frameworks include prudence as a qualitative
characteristic such the conceptual framework. Shortly, prudence is a
qualitative characteristic in the form where it doesn’t affect the reliability
in a bad way.

 

Secondly, it is clear that prudence increases the usefulness
of information provided to various users in terms of helping them in their
decision-making. According to IASB, financial statements are more useful to
investors thanks to prudence that strengthens this argument. Furthermore, the
information provided by financial statements to its users should be neutral
which is an essential component for faithful representation to help them making
right decisions. So, if prudence is used in a right way by avoiding
overstatement of assets and income and by avoiding understatement of
liabilities and expenses, it will be a component of these characteristics (e.g.

neutrality), making the information provided reliable and therefore useful to its
users.

 

On the other hand, others think that prudence doesn’t make
the information useful. Thereby, it would not help to the users in their
decision-making. For instance, from the perspective of some investors, prudence
can reduce the neutrality and let them give insufficient decisions when making
investment because of over, under statement of assets, income, liabilities,
expenses etc. They also worry about misallocation of capital as a result.

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