Conceptual framework for financial accounting and reporting vision

LO2: demonstrate an understanding of contemporary measurement issues in financial reporting and their application in practice.

Read the following statement and answer the question:

Over the past decade, the European nations have encountered significant financial reporting changes. There has been considerable debate whether “International Financial Reporting Standards (IFRS)”, as the significant international standards, need to include prudence and its significance in the conceptual framework. However, prudence has been eliminated after the global financial crisis as a part of the conceptual framework introduced in 2010. Prior to that period, prudence has been included in the framework of IASB in the description of the qualitative characteristics of reliability (Accaglobal.com, 2018). However, in 2015, the prudence concept has been reinitiated in 2015, which has further aggravated the debate. Therefore, the current paper aims to discuss the arguments for and arguments against the inclusion of prudence in the conceptual framework.

Arguments for and against the inclusion of prudence in the conceptual framework:

Arguments against the inclusion of prudence in the conceptual framework:

Prudence is not a valuable concept from the practical perspective, as it is too vague. More precisely, it does not assist with the issue of the amount of prudence to be applied in any particular situation. This is because there is no scale of measuring relevance. In addition, it needs to be kept in mind that the prudence case takes place during uncertainty and for this reason; it would be inconsistent conceptually for dismissing prudence, as it is not precise in application (Barker, 2015). Instead, it is a vague concept and this uncertainty is the reason behind its existence initially. In reality, determining the technique and the way of applying prudence becomes a judgemental matter at the level of standards and the framework’s role is to develop the underlying concept.

References:

Accaglobal.com. (2018). [online] Available at: https://www.accaglobal.com/content/dam/acca/global/PDF-technical/financial-reporting/tech-tp-prudence.pdf [Accessed 12 Nov. 2018].

Tracey, E. (2015). Discussion of ‘Conservatism, prudence and the IASB's conceptual framework’by Richard Barker (2015). Accounting and Business Research, 45(4), 539-542.

Watts, R. L., and Zuo, L. (2016). Understanding practice and institutions: A historical perspective. Accounting Horizons, 30(3), 409-423.