Accounting conservatism: Prudence at the Hearth of Financial Reporting

Abstract

The formation of accounting figures, particularly profit and assets, depends on the recognition rules prescribed by accounting standards through their underlying principles.

The principle of accounting conservatism, as a governing rule for the recognition of revenues and expenses, creates an asymmetry in recognizing gains and losses, based on the idea of recording probable expenses while recognizing only realized revenues.

This asymmetry in recognition can lead to assets and liabilities not being measured at their fair value, thereby introducing bias and undermining accounting neutrality.

Understanding accounting conservatism thus requires the presentation of a conceptual framework of the principle through its definitional approaches, mechanisms, explanatory foundations regard to the faithful representation of financial information.

This article aims to provide a critical state-of-the-art review of accounting conservatism through its mechanisms and explanations, notably via an integrative reading of the literature, complemented by a normative analysis of the Moroccan General Code of Accounting Standardization, where it is reflected in the principles of prudence and historical cost.

Classification JEL : M41

Paper Type : Theoretical Research