whether Prudence should be reinstated in the IASB’s

whether Prudence should be reinstated in the IASB’s

The IASB Conceptual Framework is a body that sets out the guiding principles that control the preparation, presentation and communication of financial statements. The framework as the Accounting Standard Board does not have sufficient accounting standards. The conceptual framework provides the IASB with (Whittington 2013, p. 500):

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• Establishment of International Financial Reporting Standards usable in the foreseeable future. It is also involved in the review of efficiency of current International Accounting Standards.
• Promotes the concept of harmonizing of accounting standards, regulations, and procedures pertaining to the preparation of financial statements. The framework provides limiting factors in the reduction of available alternative accounting techniques provided by international standards (Whittington 2013, p. 500).

During preparation of financial statements, preparers should take into account the issue of uncertainty. For example, they should address the issue of doubtful debts, provision for contingent liability and collection of receivables. In such instances, prudence concept must be factored to ensure fair presentation of the financial statements (Ohlson et al., 2010, p.480).

Prudence Concept

Prudence concept involves inclusion of precautions in the decision needed to create a provision to meet components of uncertainty. Accounting presentations and transactions are sometimes unpredictable. Therefore, in order to be reliable and relevant, the uncertainties must be reported in time. Financial statement preparers make estimates that require subjective judgment to meet the predicted uncertainty (Ohlson et al., 2010, p.480).

Examples

Probable expenses, for instance, most bad debt expenses are probable. Therefore, many businesses are required to create a contra-account. The account relates to the accounts receivable and it is referred as allowance for bad debts. The account brings balances in the accounts receivable to the realizable amount. This is the amount that the company expects to realize from the entire accounts receivable (KIESO et al., 2011, p. 345). The practice prevents overstatement of balance sheet totals as a result of overstated assets. On the other hand, provision for bad debts increases the amount for expenses hence redu……………………………..