Prudence

Prudence used to be a fundamental accounting concept until the IASB in their wisdom decided to replace it with the expression “neutral”

Neutral means having no leaning either one way nor the other. It’s like watching a cricket match when your own team isn’t playing – you’re quite happy just watching and have no excitable feelings in favour of either team above the other

Prudence however is rather more than simple neutrality. When I was a student we were taught to be cautious. We were taught never to anticipate a profit until it was actually achieved but always to provide for losses as soon as they were anticipated.

If you think about the 2 by 4 matrix for provisions and contingencies, we provide for a liability as soon as it is >50% probable whereas we don’t recognise an asset until it is >95% virtually certain.

From the other end, we disclose an asset where probability is between 50% and 95% but we are still recognising a provision at that probability. Lower than 50%, we don’t even disclose a contingent asset whereas we are disclosing a contingent liability from probability >5% up to 50%

These are working examples of the concept of prudence.

IF you had been reading your free daily post from http://www.accountancyage.com from the first time I started recommending it as a five-minute-a-day read, you would have known all about prudence and the under-current of revolt from professionals who want to see the return of this wonderful concept