08 Jan The IFRS Conceptual Framework, paragraph 37, indic
The IFRS Conceptual Framework, paragraph 37, indicates the following relating to the principle of conservatism or prudence: The preparers of financial statements have to contend with the uncertainties that inevitably surround many events and circumstances, such as the collectability of doubtful receivables, the probable useful life of plant and equipment and the number of warranty claims that may occur. Such uncertainties are recognized by the disclosure of their nature and extent and by the exercise of prudence in the preparation of the financial statements. Prudence is the inclusion of a degree 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 overstated and liabilities or expenses are not understated. However, the exercise of prudence does not allow, for example, the creation of hidden reserves or excessive provisions, the deliberate understatement of assets or income, or the deliberate overstatement of liabilities or expenses, because the financial statements would not be neutral and, therefore, not have the quality of reliability. For the past few years, the International Accounting Standards Board (LASB) has been working on revising the IFRS Framework. In 2008, the IASB issued an Exposure Draft that proposed, among other changes, excluding the principle of prudence/conservatism from the Framework. Required: Evaluate the merits of excluding prudence/conservatism from a revised IFRS Framework. Consider both arguments for keeping and for excluding prudence in the new Framework. View Solution: The IFRS Conceptual Framework paragraph 37 indicates the following relating
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