The principle of conservatism brings biasedness in reporting hence fails to provide useful information to the users of general purpose reporting, so the balance of desirability of conservatism and criticism has to be established.
The primary reason for the preparation of general purpose reporting is to remove the information asymmetry between the managers and shareholders and to provide useful information to the users. Contradictory to fair value, conservatism anticipates no profit but anticipate all losses (Bliss, 1924), as it realizes all the losses in the earnings but gains are not recognized in the income statement. Conservatism also requires getting of higher degree of verification for the good news as compared to bad news (Sadipta Basu, …show more content…
Conservatism has influenced the accounting theories and practices for centuries. Discussions on lower of cost or market can be traced to Savary (1712). If it is used since long, so indeed it has attached advantages for its use. On other side there are also some criticism against the principle. So in this paper we will evaluate the merits and demerits of conservatism before reaching to the overall conclusion.
Separation of ownership and control results in information asymmetry. Conservatism accounting system supports the timely dissemination of the bad news and losses, which stops the managers from engaging in opportunist activities. This also provide the timely information to the owners, who can diversify timely, reducing the need for the investors to concentrate on their ownership (Giner et al, 2013). Ball (2001) is also in favour of timely dissemination of the information to the debt holder, as their prime interest is in the timely information of the losses, which can cause asymmetry loss function and hence affecting the required decision …show more content…
Historical Cost Accounting which follows conservatism provides operational profit to the shareholders. So the investors come to know, how efficient company was in its operations for that particular time period, this facilitates them in effective decision making. It separates the operations from other fair value gains, hence providing operational profit to the shareholders. This also provides accountability over the management. Management gets under pressure, as they know that their evaluation will be based on operational efficiency of the firm. Resultantly, managers strive more for improving operational profits. It removes the agency problem, as it aligns the goal of the shareholders with the management. Shareholders want to yield maximum profit, when management is accountable for the profits and their KPI’s are attached to profits, they also work for the
The primary reason for the preparation of general purpose reporting is to remove the information asymmetry between the managers and shareholders and to provide useful information to the users. Contradictory to fair value, conservatism anticipates no profit but anticipate all losses (Bliss, 1924), as it realizes all the losses in the earnings but gains are not recognized in the income statement. Conservatism also requires getting of higher degree of verification for the good news as compared to bad news (Sadipta Basu, …show more content…
Conservatism has influenced the accounting theories and practices for centuries. Discussions on lower of cost or market can be traced to Savary (1712). If it is used since long, so indeed it has attached advantages for its use. On other side there are also some criticism against the principle. So in this paper we will evaluate the merits and demerits of conservatism before reaching to the overall conclusion.
Separation of ownership and control results in information asymmetry. Conservatism accounting system supports the timely dissemination of the bad news and losses, which stops the managers from engaging in opportunist activities. This also provide the timely information to the owners, who can diversify timely, reducing the need for the investors to concentrate on their ownership (Giner et al, 2013). Ball (2001) is also in favour of timely dissemination of the information to the debt holder, as their prime interest is in the timely information of the losses, which can cause asymmetry loss function and hence affecting the required decision …show more content…
Historical Cost Accounting which follows conservatism provides operational profit to the shareholders. So the investors come to know, how efficient company was in its operations for that particular time period, this facilitates them in effective decision making. It separates the operations from other fair value gains, hence providing operational profit to the shareholders. This also provides accountability over the management. Management gets under pressure, as they know that their evaluation will be based on operational efficiency of the firm. Resultantly, managers strive more for improving operational profits. It removes the agency problem, as it aligns the goal of the shareholders with the management. Shareholders want to yield maximum profit, when management is accountable for the profits and their KPI’s are attached to profits, they also work for the