TY - JOUR
T1 - Some Informational Aspects of Conservatism
T2 - European Accounting Review
AU - Beja, Avraham
AU - Weiss, Dan
N1 - doi: 10.1080/09638180601102156
PY - 2006
Y1 - 2006
N2 - Abstract When two value estimates are about equally likely, conservatism dictates reporting the less optimistic one (e.g. Lower of Cost or Market). We use an analytical model to investigate informational implications of this dictum, and identify types of environments where the conservative accounting treatment is more informative than a predetermined choice. The bias induced by the conservative choice is found to be adequately moderate, never excessive. It benefits users of the financial statements that take the reported figures at face value whenever upside errors are more costly (possibly only slightly more costly) than similar downside errors. Sophisticated users, who know how to give the reports the best possible interpretation, benefit from the lower variability, not from the bias. These latter benefits are least ambiguous when upside errors and downside errors are about equally costly.
AB - Abstract When two value estimates are about equally likely, conservatism dictates reporting the less optimistic one (e.g. Lower of Cost or Market). We use an analytical model to investigate informational implications of this dictum, and identify types of environments where the conservative accounting treatment is more informative than a predetermined choice. The bias induced by the conservative choice is found to be adequately moderate, never excessive. It benefits users of the financial statements that take the reported figures at face value whenever upside errors are more costly (possibly only slightly more costly) than similar downside errors. Sophisticated users, who know how to give the reports the best possible interpretation, benefit from the lower variability, not from the bias. These latter benefits are least ambiguous when upside errors and downside errors are about equally costly.
U2 - 10.1080/09638180601102156
DO - 10.1080/09638180601102156
M3 - Article
SN - 0963-8180
VL - 15
SP - 585
EP - 604
JO - European Accounting Review
JF - European Accounting Review
IS - 4
ER -