The concept of conservatism has been influential in the development of accounting theory and practice. A major effect of conservatism is that accountants tend to recognize losses but not gains. For example, when the value of an asset is impaired, it is written down to fair value and an unrealized loss is recognized in the income statement. However, when the asset's value appreciates, its value is not written up to fair value (an exception is investments in stock.).
- Do you believe that financial statements which recognize losses but not gains
- provide information that is relevant and representationally faithful? Explain.
- Using the Conceptual Framework developed by the FASB, can you justify the use of conservatism? Explain.
- Disregarding you answer in babove, attempt to justify the use of conservatism using theoretical reasoning.