ACCA Strategic Professional · Strategic Business Reporting (International) · The applications, strengths and weaknesses of the accounting framework
Under the 2018 Conceptual Framework, which statement best describes the role of the concept of prudence?
Prudence is the exercise of caution when making judgements under uncertainty, and it supports neutrality. It does not permit deliberate understatement of assets or income, or overstatement of liabilities or expenses, because that would be biased and undermine faithful representation.
- APrudence requires assets to be understated and liabilities to be overstated to avoid optimism.
- BPrudence is the exercise of caution under uncertainty, supporting neutrality, and does not allow deliberate understatement of assets or overstatement of liabilities.Correct
- CPrudence is a fundamental qualitative characteristic that overrides faithful representation.
- DPrudence was removed from the Framework, so it has no relationship to neutrality.
Explanation
The 2018 Framework reintroduced prudence as the exercise of caution when making judgements under uncertainty, supporting neutrality. It does not permit asymmetry such as deliberate understatement of assets or income. Option C is wrong because prudence is not a qualitative characteristic and does not override faithful representation. Option D is wrong since it is described, though not as a separate characteristic.
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