Which statement about the prudence concept as now described in the Conceptual Framework is correct?
Answer and explanation
Correct answer: B. Prudence is the exercise of caution under uncertainty but does not allow deliberate understatement of assets
- Step 1: The 2018 Framework reintroduced prudence as support for neutrality: caution when making judgements under uncertainty.
- Step 2: It does not permit asymmetric treatment such as deliberately understating assets or overstating liabilities.
- Step 3: The other options contradict that.
Answer
Prudence is the exercise of caution under uncertainty but does not allow deliberate understatement of assets.
Why not the others: Deliberate overstatement of liabilities breaches neutrality, so it is not allowed. Prudence caution means not recognising unrealised gains early; it does not require early recognition. Neutrality remains part of faithful representation, and prudence supports it.
Practise more Conceptual framework and accounting concepts.
Free questions with an explanation for every one, and full timed ACCA Applied Knowledge (BT, MA, FA) mock tests.
More Conceptual framework and accounting concepts questions
- Under the IASB Conceptual Framework, which two characteristics are the fundamental qualitative characteristics of useful financial informati…
- Information is described as 'capable of making a difference to the decisions made by users'. Which qualitative characteristic is this?
- A company records its machinery at the price it paid and does not adjust the figure each year for increases in market value. Which concept o…
- A business has bought a motor vehicle for use in the business for five years. It does not record the vehicle at its scrap value on the basis…
- A business receives cash in January for goods it delivers in March. In which period should the revenue be recognised under the accruals conc…
- Which of the following is an example of a transaction that is NOT an expense according to the definition in the Conceptual Framework?