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Conservatism as a Defining Principle for Accounting

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  • Stephen Penman

    (Columbia Business School, Columbia University, USA)

Abstract

The removal of “conservatism” as a qualitative characteristic from the Conceptual Framework of the IFRS has met with considerable resistance. This paper argues that conservatism has a role in accounting, but not as a qualitative characteristic. Rather, it serves as a defining principle for how accounting is to be done. It is thus central to resolving “recognition” and “measurement” issues in the Conceptual Framework, issues that determine what actually goes into the balance sheet and income statement but issues on which the Framework is particularly weak. As a “prudent reaction to uncertainty,” conservatism supplies the investor with information about the payoffs to investments, particularly the uncertainty involved in those investments.

Suggested Citation

  • 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.
    • Handle: RePEc:kob:tjrevi:dec2016:v:6:p:1-16
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    File URL: https://www.rieb.kobe-u.ac.jp/tjar/article/vol6/pdf/1.Penman.pdf
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    References listed on IDEAS

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    Cited by:

    1. Claudia Catalina CIOCAN & Iuliana GEORGESCU & Mihai CARP, 2020. "The Perception of the Representatives of the Accounting Profession from Romania on the Relationship Between Conservatism and True and Fair View," The Audit Financiar journal, Chamber of Financial Auditors of Romania, vol. 18(159), pages 585-585.

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    More about this item

    Keywords

    Accounting Policy; Conservative Accounting;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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