Conservatism and prudence in accounting

Nashkerska Halyna
PHD in Economics, Associate Professor of the Department of Accounting and Auditing, Ivan Franko National University of Lviv, Lviv, E-mail:halyna.nashkerska@lnu.edu.ua, ORCID ID: https://orcid.org/0000-0003-0461-2920

Cite this article:

Nashkerska H. (2023) Conservatism and prudence in accounting. Ed.: V.V. Kovalenko (ed.-in-ch.) and others [Konservatyzm ta obachnist u bukhhalterskomu obliku; za red.: V.V. Kovalenko (gol. red.)], Scientific Bulletin of the Odessa National Economic University (ISSN 2313-4569), Odessa National Economics University, Odessa, No. 3-4 (304-305), pp. 26-31.

Abstract

The purpose of this article is to carry out the relationship between prudence and conservatism for use in accounting. The main research methods were general and special scientific approaches to theoretical generalization and grouping, systematization, comparative analysis, logical generalization. In practice conservatism more than offsets managerial bias, and on average defers the recognition of losses in a timelier manner than gains. Accounting conservatism can be defined as tendencies that result in the downward of accounting net asset value relative to economic net asset value. The explanations for conservatism are contracting, shareholder protection and taxation. In practice, «conservatism» and «prudence» are usually used interchangeably, while «prudence» supports the existence of conservatism and manifests itself as caution when making judgments in conditions of uncertainty. The IASB has returned prudence to framework but provided a new explanation. The exercise of prudence means that assets and income are not overstated and liabilities and expenses are not understated. Equally, the exercise of prudence does not allow for the understatement of assets or income or the overstatement of liabilities or expenses. The level of due diligence that supports the neutrality defined by the Conceptual Framework and is the result of the proper use of both this framework and the requirements of individual IFRS will be permissible. Excessive prudence is not desirable, as intentional understatement of assets or income, overestimation of liabilities or expenses, formation of excessive or hidden reserves contradict the requirements for truthful presentation of indicators in financial statements, the characteristics of which be complete, neutral and free from error. Peculiarities of application in accounting of conditional and unconditional conservatism are studied. A list of conditional and unconditional is given practices of conservatism, their explanation and consequences of application.

Keywords

prudence, conservatism, accounting, unconditional conservatism, conditional conservatism, neutrality.

JEL classification: M410; DOI: 10.32680/2409-9260-2023-3-4-304-305-26-31

UD classification: 657.1

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