Thursday, March 17, 2011

Paper 1.1 Chap:4

Paper 1.1
Chapter 4
The Accounting Concepts - Part 3 (Why does the ASB hate Prudence?)

Through time and age, men always seemed to be in contradiction with women, and
that’s how it is with Accruals and Prudence. The puzzled look on every man’s mind
when the lady asks “Do I look fat?” is very similar to that of an accountant, when
asked “Should we report the worst possible situation, prudence? Or the most likely
position, matching?!”

On a more serious note,

1. Prudence is in a conflict with the going concern concept because it may not be
prudent to assume that the business is a going concern.
2. Furthermore, prudence makes it difficult to treat items consistently because at one
period, an item may require different treatment than it did in a previous period.
E.g. prior year adjustments.
3. The prudence concept also contradicts the objectivity concept in that it requires
subjective judgment in prudent situations.
4. It is also difficult to value assets at anything but the historical cost convention
because it wouldn’t be prudent to recognize a gain in revaluation for example.
Seems short, and incomplete doesn’t it? Well any suggestions are welcomed.