PROBLEM 2–1 A standard setter recently made a private remark that conservatism was a “barbaric relic” that violated the “neutrality” requirement of accounting information and that financial statements would be far more informative without conservatism.

Required:

a. What is conservatism? What are the reasons why conservatism continues to be dominant in financial statements?

b. Do you agree with the observation by the standard setter?

c. As an analyst would you prefer conservative accounting? Does your answer depend on your analysis objective?

For example, would you prefer conservative accounting if you were an equity analyst?

d. Many regard conservative accounting as “high-quality” accounting. Do you agree with this statement? Provide arguments for why you think conservative accounting increases or impedes accounting quality.

e. Academics refer to two forms of conservatism. What are they? Which form of conservatism do you think is more useful for an analyst?