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Accounting Conservatism under IFRS

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  • Niclas Hellman

Abstract

In a recent discussion paper on an improved conceptual framework (IASB, 2006a), the IASB and the FASB argue that prudence and conservatism are not desirable qualities of financial reporting information (IASB, 2006a, BC2.22). One interpretation of this proposal is that the consistent undervaluation of net assets (consistent conservatism), which used to be common under Continental European GAAPs and to some extent under US GAAP, is not considered to be an adequate way of dealing with uncertainty. Instead, the changes in the business conditions of a firm should be, to a greater extent, reflected in the financial reporting via changes in future-oriented estimates and probabilities. In turn, this should increase the decision relevance to users. However, although the boards suggest that the improved framework will not include prudence or conservatism as desirable qualities, this paper suggests that a more valid description is that consistently conservative accounting treatments will be replaced by accounting methods that leave more opportunities for temporary conservatism (changes in accounting estimates that temporarily understate net assets via the creation of hidden reserves which later may be reversed). From a user perspective, temporary conservatism is demanding because of the increased income-shifting between periods. This is illustrated in the paper by examining three cases concerning loss carryforwards, development costs and construction contracts, related to three different standards (IAS 12, IAS 38 and IAS 11, respectively). Furthermore, the paper illustrates how the mixing of consistent and temporary conservatism may lead to counter-intuitive interpretations of the underlying business activities that, in turn, make the information less relevant to users.

Suggested Citation

  • Niclas Hellman, 2008. "Accounting Conservatism under IFRS," Accounting in Europe, Taylor & Francis Journals, vol. 5(2), pages 71-100, December.
  • Handle: RePEc:taf:acceur:v:5:y:2008:i:2:p:71-100
    DOI: 10.1080/17449480802510492
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    Citations

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    Cited by:

    1. Jan Hájek, 2020. "Effect of tax deductibility on technical reserves recognized by Czech and Slovak insurance companies [Vliv daňové uznatelnosti na výši technických rezerv tvořených českými a slovenskými pojišťovnam," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2020(3-4).
    2. Jan Hájek, 2020. "Effect of tax deductibility on technical reserves recognized by Czech and Slovak insurance companies [Vliv daňové uznatelnosti na výši technických rezerv tvořených českými a slovenskými pojišťovnam," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2020(3-4), pages 25-37.
    3. Liliana Feleagă & Voicu D. Dragomir & Niculae Feleagă, 2010. "National Accounting Culture And The Recognition Of Provisions: An Application Of The Prudence Principle," Post-Print hal-00481581, HAL.
    4. Zeljko Grubljesic & Dalibor Pavlovic & Ratko Garic & Rajko Macura & Vesna Petrovic, 2016. "The Importance Of The Adoption And Application Of Accounting Policies Transition Countries With Regard To Companies In Serbia," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 82-86, February.
    5. Panayotis Manganaris & Jordan Floropoulos & Irini Smaragdi, 2011. "Conservatism and Value Relevance: Evidence from the European Financial Sector," American Journal of Economics and Business Administration, Science Publications, vol. 3(2), pages 259-269, April.
    6. Dargenidou, Christina & Jackson, Richard H.G. & Tsalavoutas, Ioannis & Tsoligkas, Fanis, 2021. "Capitalisation of R&D and the informativeness of stock prices: Pre- and post-IFRS evidence," The British Accounting Review, Elsevier, vol. 53(4).
    7. Philip Beaulieu & Louise Hayes & Lev M. Timoshenko, 2023. "Changes in accounting estimates: An update of priors or an earnings management strategy of “last resort”?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(3-4), pages 622-659, March.
    8. Juniarti, 2018. "The Accounting Conservatism of the Adoption of IFRS in Indonesia," GATR Journals afr162, Global Academy of Training and Research (GATR) Enterprise.
    9. Wakil, Gulraze & Petruska, Karin A., 2022. "Does mandatory IFRS adoption affect large and small public firms' accounting quality differently? Evidence from Canada," Advances in accounting, Elsevier, vol. 57(C).
    10. Tamer Elshandidy & Ahmed Hassanein, 2014. "Do IFRS and board of directors' independence affect accounting conservatism?," Applied Financial Economics, Taylor & Francis Journals, vol. 24(16), pages 1091-1102, August.

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