Principle of prudence

Yahoo  Sep 12  Comment 
The U.S. Federal Reserve must be careful not to remove its monetary stimulus too quickly because of potential weakness in the labor market and risks of foreign economic downturns, Fed Governor Lael Brainard said on Monday. "Today's new normal...
New York Times  Sep 12  Comment 
The remarks by Lael Brainard, a proponent of continuing the Fed’s stimulus campaign, reinforce expectations that the Fed won’t raise rates this month.
The Economic Times  Mar 1  Comment 
 "It is pretty difficult for me as an analyst to look at it and say if the capacity utilisation of the industry is low at 70 per cent"
The Economic Times  Feb 27  Comment 
Initiatives such as Digital India and Startup India will play a significant role in narrowing the gap between the demand and supply of skilled labour.
Wall Street Journal  Feb 11  Comment 
The Anglo-Australian miner has introduced a new dividend policy, shifting toward a payout linked to earnings. That looks a sensible move given the continuing commodities downturn.
Financial Times  Nov 17  Comment 
Pharmaceuticals group has been given the benefit of the doubt. Now the pressure is on
New York Times  Sep 28  Comment 
John McDonnell, Labour’s newly appointed shadow chancellor of the Exchequer, moved to calm fears that the party would turn away from centrist economic policies of the past.
The Hindu Business Line  Aug 3  Comment 
With reference to the news that the RBI may hold repo rate cuts till September -- while the RBI advocates benign austerity, the government guns for growth through reduction of key rates. A...


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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