The Japanese Accounting Review
Online ISSN : 2185-4793
Print ISSN : 2185-4785
ISSN-L : 2185-4785
Conservatism as a Defining Principle for Accounting
Stephen Penman
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JOURNAL FREE ACCESS Advance online publication

Article ID: 6.2016.03


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.

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