Read the following extract from an article about a business venture of the Bob Jane company. Required
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Read the following extract from an article about a business venture of the Bob Jane company.
Required
Do you agree with removing prudence from the Conceptual Framework? Why / Why not?
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Is prudence still a virtue? The concept of prudence and its use, or non-use, in financial reporting has been the cause of much angst and the subject of swirling debates in recent years. Outside of accounting and legal circles, prudence, like so many other words of another era, is a descriptor, if not a concept, on the wane. It refers to the exercise of good judgment, informed by intelligence and good char- acter. Prudence requires the consideration of long-term choices and implications of decisions, and the avoidance of biases that make us focus on the here and now. For decades, the concept of prudence had been part of financial reporting frameworks. It was recognised as part of the qualitative characteristic of 'reliability' within the International Accounting Standards Board's (IASB) conceptual framework until 2010, when the IASB decided to replace it with the concept of neutrality. In order to better understand the IASB's decision to remove prudence from the conceptual framework, let us first look at its pre-2010 definition of the word, which was 'the inclusion of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty, such that assets or income are not over- stated and liabilities or expenses are not understated'. While some argue that there is nothing wrong with this definition, in practice there have been some real issues with interpretation, par- ticularly as it can cause a bias towards conservatism in financial reporting. Or worse, as the IASB chairman put it in a 2012 speech: 'Many felt that in practice the concept of prudence was often used as a pretext for cookie jar accounting'. As professionals, we strive to remove bias from our everyday actions why should financial reporting be any different? Prudence causes bias in financial reporting through introducing a degree of conservatism that diverges from the presentation of unbiased or neutral financial reports. There is no doubt that pru- dence and conservatism were perhaps more important concepts in a time when the accounting standards and frameworks were less well developed, to encourage the exercise of caution by finan- cial report preparers when there was no clear guidance or requirement set out to tackle a particular financial reporting issue. However, in more recent times, accounting standards and frameworks have become much more well developed, obviating the need for the concept.
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Financial Accounting
ISBN: 9780730363217
10th Edition
Authors: John Hoggett, John Medlin, Keryn Chalmers, Claire Beattie, Andreas Hellmann, Jodie Maxfield
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