SOAS Research Online

Abstract

The International Accounting Standards Board (IASB) has persistently rejected a role for asymmetric prudence (conservatism) in its Conceptual Framework (CF) while simultaneously acknowledging its selective relevance in standard setting, thus presenting something of a conundrum. This thesis aims to provide a new understanding of the IASB’s rejection of conservatism in its CF by undertaking an extensive empirical examination of constituent feedback and Board arguments presented during the development of the 2018 CF. Chapter two reviews the accounting literature on contracting between managers and capital providers that theorises the widespread private contracting demand for conditional conservatism in typical debt and equity settings. Conservatism is identified as an efficient control mechanism that enhances the credibility of financial statements against pervasive agency and incomplete contracting problems. Chapter three discusses the significance of a CF for Generally Accepted Accounting Principles (GAAP). It identifies the normative association of prudence with stewardship and reliability and highlights their declining significance within the CF. Chapters four and five discuss methodology used for analysis, and examine constituent feedback and Board arguments underlying the demand for stewardship, reliability and prudence. Key findings suggest inadequate representation of lender and shareholder interests, preponderance of conceptual over economic arguments, a strong Europe-IASB divide and Board pragmatism in seeking status quo. Despite the modest restoration of stewardship within decision-usefulness and an allowance for cautious prudence, the CF reveals a disjointed approach. It is inconsistent with the established presence of asymmetry in various standards and fails to address criticism from influential constituents on the persistent rejection of reliability and asymmetry. This study constitutes a timely examination of CF developments with implications for its completeness. It also makes several observations regarding the IASB’s due process and highlights the Board’s continued predisposition towards decision-usefulness that precludes a substantive acknowledgement of concepts important to primary users of financial statements