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Accounting conservatism is considered as a basic characteristic of financial reporting in relation to earnings quality since it enhances the reliability of financial statements and minimizes the information asymmetry (Mohammad, Ahmed and Ji, 2010; Jeffrey et al., 2014) and monitor and control over overinvestment particularly in research and development cost (Lara et al., 2016). The conventional definition of accounting conservatism (Bliss, 1924 as cited by Watts, 2003; Ren, 2014) that states “anticipate no profit but anticipate all losses” which is also called unconditional conservatism. This concept is later on termed as an asymmetric timeliness of earnings which requires early and timely recognizing of bad news as an expected loss and deferring the good news as expected gain (Basu, 1997). This concept presented by Basu (1997) is one of the popular tools for measuring the conditional conservatism. Hence, both of the explanations (unconditional and conditional conservatism) have defined the accounting conservatism as understatement of earnings rather than overstatement. The principle of conservatism helps in reducing conflicts regarding debt-contracting and managerial contracting and also is advantageous for the business in many ways. Firstly, as discussed by Watts (2003), it limits the management’s overpayment by timely loss recognition and by delaying gain recognition. Secondly, it also restricts the management to invest in risky projects that can have negative NPV (net present value) as also referred to the “prudent concept” (Lara, Osama, and Penalva, 2009). Thirdly, management is also more inclined towards abandonment of the projects with negative NPV by following the conservative accounting principle (Watts, 2003). Fourthly, these principles (of conservatism) also forced the accountants to report true efficiency of their firms in terms of earning quality and net worth. In the light of all these advantages of accounting conservatism, a positive association of the strength of accounting conservatism and performance of the firm is emerged (Duellman, 2006; Lara et al., 2016).
However, on the other hand, there are academics, capital market regulators, and standard-setters who also criticized the concept accounting conservatism. For instance, according to LaFond and Watts (2008), on one hand the accounting conservatism understates the net assets of a firm in the current period, but on the other hand it overstates the earnings of the same firm in future periods because of the understatement of future expenses. Irrespective of the criticisms made by various researchers, the empirical research also designates accounting conservatism as ever-increasing phenomenon for the last few decades (e.g. see Givoly & Hayn, 2000 & 2002; Kim & Kross, 2005; and Lobo & Zhou, 2006; Lara et al., 2016). This seems that the critics have overlooked to the principle of accounting conservatism as Lara et al. (2016) findings report that conservatism is a mechanism that reduces overinvestment (e. g. research and development expenditure). Therefore, a detail investigation in this area is required to answer the important unrevealed questions.