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ACCA Applied Knowledge · Financial Accounting · Qualitative characteristics of useful financial information

Which of the following best describes how prudence is treated in the current IASB Conceptual Framework?

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, nor overstatement of liabilities or expenses, so hidden reserves are not allowed.

  1. APrudence is a fundamental qualitative characteristic that overrides neutrality
  2. BPrudence is the deliberate understatement of assets and income to create reserves
  3. CPrudence is the exercise of caution under uncertainty and supports neutrality; it does not allow deliberate understatement or overstatementCorrect
  4. DPrudence is no longer relevant and has no link to uncertain estimates

Explanation

The Framework states that neutrality is supported by the exercise of prudence, meaning caution when making judgements under uncertainty. It does not allow asymmetry such as deliberately understating assets or income, so the option about creating reserves is wrong.

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