Conservatism as a Defining Principle for Accounting

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.