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Conservatism, prudence and the IASB's conceptual framework

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  • Richard Barker

Abstract

The argument in this paper is that financial accounting is inherently conservative, in that a neutral application of the International Accounting Standards Board (IASB's) definition of (net) assets leads to book value being less than economic value. There are both conceptual and practical reasons for this outcome, neither of which is explained by an intention to be conservative, by an asymmetry or bias that is designed to lead to a conservative outcome. Financial accounting is not a system for the neutral measurement of economic value. Book value and economic value are instead conceptually different, with conservatism resulting from that difference. This inherent conservatism seems to have been overlooked both by the IASB and by its critics. The IASB has sought to remove prudence from its framework and has attracted criticism from the academic and practitioner communities for doing so. Yet the challenges to the framework implied by adopting an agency-based, contracting demand for prudent accounting are criticisms of a problem that for the most part does not exist.

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  • Richard Barker, 2015. "Conservatism, prudence and the IASB's conceptual framework," Accounting and Business Research, Taylor & Francis Journals, vol. 45(4), pages 514-538, June.
    • Handle: RePEc:taf:acctbr:v:45:y:2015:i:4:p:514-538
    DOI: 10.1080/00014788.2015.1031983
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    Cited by:

    1. Claudia-Cătălina Ciocan, 2019. "Analysis of the Relation between Conservatism and the Amount of Dividends Payable to Shareholders. The Case of Romanian Listed Companies," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(1), pages 570-579, August.
    2. Olante, Maria Elena & Lassini, Ugo, 2022. "Investment property: Fair value or cost model? Recent evidence from the application of IAS 40 in Europe," Advances in accounting, Elsevier, vol. 56(C).
    3. Hayoun, Shaul, 2019. "How fair value is both market-based and entity-specific: The irreducibility of value constellations to market prices," Accounting, Organizations and Society, Elsevier, vol. 73(C), pages 68-82.
    4. Carien van Mourik & Yuko Katsuo Asami, 2018. "Articulation, Profit or Loss and OCI in the IASB Conceptual Framework: Different Shades of Clean (or Dirty) Surplus," Accounting in Europe, Taylor & Francis Journals, vol. 15(2), pages 167-192, May.
    5. Stephen Penman, 2016. "Conservatism as a Defining Principle for Accounting," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 6, pages 1-16, December.
    6. Richard Barker & Alan Teixeira, 2018. "Gaps in the IFRS Conceptual Framework," Accounting in Europe, Taylor & Francis Journals, vol. 15(2), pages 153-166, May.
    7. John Richard Edwards & Trevor Boyns, 2022. "Published Accounts, Stewardship, and Decision Making: A Case Study 1863–1940," Abacus, Accounting Foundation, University of Sydney, vol. 58(2), pages 300-333, June.

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