Did removing prudence from the Conceptual Framework impact accounting conservatism?

Abstract

The International Accounting Standards Board (IASB) removed explicit reference to the concept of prudence within the Conceptual Framework (CF) with effect from September 2010. This paper examines whether practitioner concerns that the removal of prudence might lead to a decrease in accounting conservatism and an increase in earnings management or overstated results were justified. It takes a sample of firms from the UK FTSE350, Australian ASX 300 and the South African JALSH (Johannesburg All Share) and evaluates three popular measures of accounting conservatism over the fourteen-year period of 2003-2016 (seven years pre and post the removal of prudence from the CF). The measures of accounting conservatism used were asymmetric timeliness of earnings, market-to-book ratio and total/non-operating accruals. Using all three measures, there was no evidence that the level of accounting conservatism has reduced during the period following the removal of prudence in the CF in those countries using IFRS. Despite this, the debate around prudence has continued and the IASB has since decided to reinstate it in the 2018 revised CF, effective 1 January 2020.