The concept of conservatism/Prudent has been influential in the development of accounting theory and practice. A major effect of conservatism is that accountants tend to recognize losses but not gains. For example, when the value of an asset is impaired, it is written down to fair value and an unrealized loss is recognized in the income statement.

a. Why do you believe conservatism has affected financial reporting?

b. Do you believe that financial statements that recognize losses but not gains provide information that is relevant and representational faithful?