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Prudence should not be left shyly waiting in the wings

A UK Shareholders’ Association (UKSA) paper published today finds serious deficiencies in the International Accounting Standards Board’s (IASB’s) attempt to assure equity investors that company accounts will be more dependable in future than has been the case in recent years.

Roger Collinge FCA, UKSA’s head of corporate governance, analyses in detail faults in the IASB’s thinking revealed by a recent article written on the IASB’s behalf by IASB member Steve Cooper, published in the IASB’s journal, Investor Perspectives. The article, “A tale of ‘prudence’” sets out to explain how the IASB has responded to investors’ concerns that the removal of ‘prudence’ as an accounting principle from International Financial Reporting Standards (IFRS) was a contributing factor in the banking crisis of 2008.

The IASB is responsible for IFRS and has just published what it calls an ‘exposure draft’ of a revised Conceptual Framework for Financial Reporting. This is where the concept of prudence reappears, but as the conceptual framework is not being accorded the status of a standard, neither is prudence. UKSA has long campaigned for the reintroduction of prudence, but as a standard, not as some vague reference point. UKSA questions the logic behind the conceptual framework and is asking the IASB to think again. Any body of work which purports to have underlying concepts must fully embrace those concepts.

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