When Australia moved to IFRS in 2005, the IASB’s 1989 Framework for the Preparation and Presentation of Financial Statements replaced the Australian systems of SACs 3 and 4. The IASB framework included a specific reference to “prudence” in 37-38 as part of the Qualitative Characteristics of Financial Statements. Some viewed this to be in direct conflict with the goals of “neutrality” 36 and “faithful representation” 33-34. Subsequently the 2010 update to the Conceptual Framework (CF) entitled “Framework for the Preparation and Presentation of Financial Statements” removed any reference to either prudence or conservatism. This new framework was adopted by the AASB on 1 July 2014.
This overturned 100 years of accounting assumptions since Paton’s (1916) seminal work in Principles of Accounting. Many in the profession expressed concern that this may open the door to overly optimistic reporting and thus potentially increase auditor’s liability.The CF project is a work in progress, and the IASB is currently seeking public comment on their new Exposure Draft for the new CF.
You are in the graduate rotation program at Big Phore Partners, currently your 6 month placement is with the Financial Analysis Team (Corporate Advisory Group). A heated debate has broken out between the partners on the matter of prudence. Mr Price (Executive Director of Audit), believes prudence is a cornerstone of financial reporting, but Dr Waterhouse (Executive Director of Corporate Advisory) believes it is critical that investors get “the right information” to make “the right decision”. Executive Chair Dr Coopers believes that the firm should have an internal debate to settle the matter, and subsequently the firm should make a formal submission to the IASB on the outcome.
You have been asked to draft the initial discussion paper for Board of Executive Directors:
Outline the context of the change, and explain the arguments for and against the re-inclusion of prudence in the new CF
A draft submission letter to the IASB answering to what extent does your firm support re-inclusion of prudence?
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