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The Relationship Between Ias 37 And Principle Of Accounting Prudence

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Introduction IAS 37 is about the accounting for provisions, contingent liabilities and contingent assets. The use of this standard is inseparable from the principle of accounting prudence, however, some comments indicated that IAS 37 has undermined this principle and resulting in considerable volatility in the earning reports. This essay aims to explore the standard and discuss the relationship between IAS 37 and principle of accounting prudence and show my opinion of the comments above. Main Body The prudence concept, also known as the conservatism principle. This convention refers to the accounting practice of recognising all possible losses, but not anticipating possible gains (D. Alexander and A. Britton, 2001). Under the prudence…show more content…
A provision is a liability of uncertain timing or amount. A liability is a present obligation of the entity from past events, the settlement of which is expected to result in the outflow from the entity of resources embodying economic benefits. (D. Alexander, 2014). This means that provision is a subset of liability. Before the promulgation of IAS 37, there was some misuse of provisions, such as income smoothing it is minimising volatility in earnings, and also ‘Big bath Accounting’. Obviously, these against to the principle of prudence then IAS 37 effectively banned these. However, IAS 37 contravenes the concept of prudence in the following two ways: it was pointed out that IAS 37 lacks prudence in that it does not require the recognition of, and accounting for all future expenses (D. Alexander,2014). In addition, it requires a great deal of subjective judgment, this is the problem about how to judge the liability of extremely rare case and also brings to the following question ,how reliable the measurement is. Different people have different cognition on the possible, probably that is to say people often use their subjective understanding to judge will lead to different conclusions. So that the report cannot be nature and fair to reflect the activities, causing
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