Principle of prudence

Financial Times  Mar 19  Comment 
The chancellor set out his election stall in a package that aims to be high in political resonance but low in fiscal cost
The Hindu Business Line  Mar 11  Comment 
An election year is never conducive to fiscal discipline. But the creation of Telangana has only made matters worse
Times Online  Mar 6  Comment 
Queens Park Rangers have drawn up plans to drastically reduce their losses after announcing that their net debt had risen...
The Economic Times  Feb 10  Comment 
In what may be seen as shunning populism, finance minister P Chidambaram is in fact expected to penalize several poor performers.
The Times of India  Feb 9  Comment 
The UPA government is expected to announce a minor increase in the outlays for social sector schemes, while leaving the overall Plan expenditure for 2014-15 around the same level as the Budget estimates for the current fiscal.     
The Economic Times  Jan 13  Comment 
Government is maintaining fiscal discipline before the general elections, which is supporting the country's credit ratings, a Fitch Ratings analyst said.
The Hindu Business Line  Jan 5  Comment 
Supporters call for a distinction between ‘bad’ prudence, or deliberate misstatement, and caution necessitated by uncertainty.
Forbes  Nov 15  Comment 
In a recent WSJ op-ed, former Vice President Al Gore and colleague David Blood (Gore and Blood?  Seriously?) warned that the fossil fuel industry was doomed to go the way of the dinosaurs, so to speak, as climate change regulations on greenhouse...
Channel News Asia  Oct 9  Comment 
A prudent approach to fiscal management has helped Singapore avoid the problem of public debt which beset many governments today, according to Senior Minister of State for Finance and Transport Josephine Teo.
The Hindu Business Line  Jun 24  Comment 
The CAG is now making reports ‘in the form of advisories’ to alert organisations on systematic faults and ensure fiscal prudence, says Rajan Panicker, a former deputy accountant general of Kerala.


The Principle of prudence is one of the seven principles of GAAP, and requires companies to report, on their balance sheet, the value of their assets and liabilities at their least favorable valuation. Additionally, the principle demands that income/expense recognition and projections be realistic -- i.e. revenue is not recognized unless it is certain, while expenses are recognized while they are probable.

For example, if there is a dispute about sales, the company is encouraged not to report the disputed revenue. However, if there is a lawsuit that may require the company to pay fines/fees, it has to be reported (at least in the notes).

On the other hand, investments are recorded at the value that the firm paid for it or the market value, whichever is lower. It is only after selling the position that the company recognizes any gains. Similarly, inventory of raw materials is valued at the lower of cost of purchase and market price; and inventory of finished goods are recorded at the lower of cost of production and selling price. Additionally, all real-estate assets are recorded at cost and any increase in value is not accounted for till the sale of the asset, but any significant loss of value is reported immediately. Finally, the principle requires goodwill and intangible assets to be written down gradually.

"Those with responsibility to invest money for others should act with prudence, discretion, intelligence, and regard for the safety of capital as well as income." Judge Samuel Putnum in 1830 [1] See: Prudent man rule


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