'Be Prudent in Using the Term Prudence' — A Historical Perspective on the Conceptual Transformation of Prudence in Financial Reporting

The recent revision of the IASB's Conceptual Framework (CF) was accompanied by a debate among the IASB and its constituents about the meaning and importance of the concept of prudence in financial reporting. This paper adopts a historical perspective to identify possible sources of the ambiguity and potential confusion surrounding the concept of prudence today, giving particular consideration to how the discourse on prudence has changed over time. For this purpose, prudence is traced in the US accounting literature arising in the second half of the nineteenth century as well as in the standard-setting activities evolving in the US and at the international level during the twentieth century. By identifying four constructs of prudence circulating in accounting practice, theory, and standard setting, our analysis reveals that confusion may arise due to diverging understandings of the acceptable degree of asymmetry in the treatment of gains and losses (and respectively assets and liabilities). While asymmetric treatments remained accepted in practice (and in later standards), the role of asymmetry was conceptually rejected in a decision usefulness framework, highlighting a (theoretical) conflict between prudence and neutrality. The debates on the role of prudence in a CF became increasingly abstract and artificial, thus raising questions about the role and value of a CF