Reference no: EM132627891

Conservative accounting

It seems to me that many of the investors who argue for a conservative bias in the recognition and/or measurement principles applied in financial reporting are often thinking beyond making estimates for the purpose of preparing financial statements that give the most relevant information to investors and the most realistic representation of the reporting entity's activities. They believe that financial reporting needs to also take into account other consequences of those reported amounts. These consequences include using financial statement information to help determine dividend payments to shareholders, bonus payments to management and the amount of capital a company is required to maintain. In each of these cases, the consequences of overestimating assets and profit may be more severe than the consequences of underestimates. They argue this asymmetry of consequences should drive an asymmetry of accounting. For example, paying a dividend is much easier than raising additional equity capital in a future period. If, therefore, a dividend is paid but it turns out with hindsight that the business is undercapitalised, it may be difficult to raise the additional capital needed.

Problem 1: Highlight any sentence and provide comment why you agree or disagree with the statement?