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

  This essay will be about the role and history of prudence inthe preparation, of financial statements, why prudence is regarded aqualitative characteristic of financial information and how it enhances theusefulness of information provided to various users to help them in theirdecision making. The qualitative characteristics of financial statements meanthat the information in financial statements is useful for the users of thisinformation. The qualitative characteristics in accounting are relevance,reliability, comparability and understandability. Prudence is under the reliabilitywhere the information should be reliable in order to be useful. If theinformation is neutral, free from material error, complete and has faithfullyrepresentation, it will be reliable. It’s going to be discussed that whetherthe prudence is a complement of these qualitative characteristics or not.

 In recent years, prudence in accounting and financialreporting is discussed between accountants in terms of being whether it shouldbe considered as a desirable quality of financial reporting or not. The meaningof prudence in accounting is where a firm, company should be careful because ofthe risks and uncertainty. For example, if a product or service is sold, its revenueshould not be recorded before it’s collected. At the same time, even a lossdoesn’t become definite, they should make provision for it. Similarly, RichardBarker said “Accounting is prudent if, as a result of a higher threshold ofverifiability for the recognition of economic gains than economic losses, theeconomic value of an entity’s equity exceeds its book value.” When we look at the history of prudence, we see that therewas a clear reference on prudence in 1989’s framework, yet, they didn’t includea clear reference to prudence in 2010’s Conceptual Framework which “describesthe objective of and concepts for general purpose financial reporting.

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It dealswith issues such as the definitions and measurement of assets and liabilitiesand when and how income and expenses should be recognised and presented.”Finally, a clear reference on prudence was reintroduced in “Exposure Draft” in2015 after the stakeholders and some investors wanted to see prudence inaccounting standards. It is worth noting that ‘Exposure Draft’ involves the newaccounting standards made for public commentary. Firstly, I believe that prudence should be considered as aqualitative characteristic. The role of prudence is that it avoids overstatingassets and income and avoids understating liabilities and expenses by includingthe degree of caution in accounting judgements when there is uncertainty. Thisis stated in the IASB (International Accounting Standards Board)’s frameworkwhen discussing the qualitative characteristic of reliability. Thus, this makesprudence an essential part of accounting and more specifically qualitativecharacteristics. In other words, it is a qualitative characteristic accordingto the framework and prudence should be used when including information in financialstatements.

 However, it is also about how prudence is used. If it makesfinancial 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 provisionscan’t be created. Moreover, if there are assets and income that are understatedconsciously, prudence would not be a qualitative characteristic anymore.

Thisis same for liabilities and expenses that are overstated consciously.Additionally, not all conceptual frameworks include prudence as a qualitativecharacteristic such the conceptual framework. Shortly, prudence is aqualitative characteristic in the form where it doesn’t affect the reliabilityin a bad way.  Secondly, it is clear that prudence increases the usefulnessof information provided to various users in terms of helping them in theirdecision-making. According to IASB, financial statements are more useful toinvestors thanks to prudence that strengthens this argument. Furthermore, theinformation provided by financial statements to its users should be neutralwhich is an essential component for faithful representation to help them makingright decisions.

So, if prudence is used in a right way by avoidingoverstatement of assets and income and by avoiding understatement ofliabilities and expenses, it will be a component of these characteristics (e.g.neutrality), making the information provided reliable and therefore useful to itsusers. On the other hand, others think that prudence doesn’t makethe information useful. Thereby, it would not help to the users in theirdecision-making. For instance, from the perspective of some investors, prudencecan reduce the neutrality and let them give insufficient decisions when makinginvestment 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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