Reference no: EM132910318

The concept of conservation has been influential in the development of accounting theory and practice. A major effect of conservatism is that accountants tend to recognize losses, but not gains. For example, when the value of an asset is impaired, it is written down to fair value and an unrealized loss is recognized in the income statement. However, when the asset's value appreciates, its value is not written up to fair value. (An exception is current accounting for investments is securities having readily determinable fair values. ) Stated differently, accountants tend to recognize holding losses, but not holding gains.

Problem a) Define conservatism

Problem b) Why do you believe conservatism has affected financial reporting? Explain

Problem c) Do you believe that financial statement that recognize losses but not gains provide information that is relevant and representationally faithful? Explain

Problem d) Do you believe that the concept of conservatism is consistent with the physical capital maintenance concept? Explain

Problem e) Do you believe that the concept of conservatism is consistent with the financial capital maintenance concept? Explain