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The prudence concept requires that expenses and liabilities are recorded as soon as incurred but revenue is recorded when attained

March 12, 2019 0 Comment

The prudence concept requires that expenses and liabilities are recorded as soon as incurred but revenue is recorded when attained (Business Dictionary). It ensures that income is not overstated whilst expenses and liabilities are not underestimated, thereby making certain that there is a degree of caution in implementing policies whilst maintaining going concern for the company (HMRC, 2013). However, precipitated by the financial crisis in 2008, several accounting academia have scrutinised prudence as an inadequate way of dealing with assets and income because of its rigidity in constantly undervaluing assets. Contrastingly, some adopt the consensus that the demotion of the concept to ‘desirable’ quality in financial reporting as opposed to a fundamental concept in the FRS 18(Christodoulou, 2010) inevitably led to the absence of prudent transactions by bank accountants, consequently causing the fall of the economy. Whilst other traditionalist critics such as The Chartered Financial Analyst (CFA) argue that exercising prudence allows for a lack of neutrality in financial (ACCA, 2014), some financial analysts such as Tim Bush and Eumedion argue that prudence rightfully coordinates the interest of shareholders with the objectives of management (Macuica, 2015).