Accounting Conservatism in Perspective

• In Event: Earnings Management

Abstract

The literature offers two schools of thought on the need for accounting conservatism. While one voice argues for promotion in conservatism in financial reporting (Watts, 2003), the other argues against it (FASB, 2008; Gigler, Kondia, Sapra, & Venugopalan, 2009; IASB, 2010). The FASB in its Exposure Draft on the Conceptual Framework for Financial Reporting posits that conservatism results in bias in the reported financial position and financial performance, and as such excludes it from the framework as a desirable quality of financial reporting information (FASB, 2008). In addition, the International Accounting Standard Board (IASB, 2010) removed the concept of conservatism from the conceptual framework. The IASB argues that conservatism is not compatible with neutrality, a desired qualitative characteristic of financial reporting. The incompatibility is due to the biases that conservatism introduces into financial reporting. This development raises several questions: Why the move toward neutrality? What is the effect of neutrality on the quality of financial reporting? This study considers a review of conservatism in the accounting literature. The study considers the definition, measure, and theories of accounting conservatism. In addition, this study examines the usefulness of conservatism, offers a review of conservatism in the literature, neutrality from the IASB/FASB perspective and the outlook of conservatism in accounting.

Authors

• Afua ATAA BOAKYEWAA Agyekum, Morgan State University

• Kang Cheng, Morgan State University