1. The existing Conceptual Framework has several notable omissions. It does not include an explicit reference to substance over form nor does it define derecognition or when derecognition should occur. The International Accounting Standards Board has also removed prudence from its framework and has attracted criticism from the academic and practitioner communities for doing so. However, the Exposure Draft on the Conceptual Framework attempts to explain the roles of prudence and substance over form in financial reporting whilst putting forward proposals to clarify the aims of the accounting requirements for derecognition.

Required:

(i) Discuss the features of the concept of prudence and the arguments for and against its re-introduction into the Conceptual Framework. (7 marks)

(ii) Explain why it is important for there to be guidance in the Conceptual Framework on the role of substance over form, and the principles relating to derecognition set out in the Exposure Draft on the Conceptual Framework. (8 marks)