On The Application Of Conservatism In Accounting In China

The prudence principle is that accountants should take certain measures in accordance with the uncertain factors in economic activities, or some accounting methods and procedures should be applied in some economic pactions. Each method and procedure has the same theoretical and logical correctness. If the accountants are doubtful about what method to adopt, the conservatism requires that, without affecting the authenticity, the conservatives should adopt a conservative approach and choose accounting and handling methods and procedures that have the least optimistic impact on owners' equity. Try to avoid overestimating assets and profits and underestimating liabilities and losses, and require accountants to tend to identify more good news (such as gains) than bad news (such as losses) and require more evidence. The conservatism principle is also known as

The purpose of the conservatism principle is to prevent enterprises from exaggerating assets and profits and curb the risks they bring to the production and operation of enterprises.

In our country, the principle of conservatism has attracted people's attention. It is still a matter of nearly ten years.

The origin of the principle of stability is the historical starting point of the stability principle. The origin of the principle of stability can be traced back to the medieval trustee's strategy of relieving his fiduciary duty.

This reduction of responsibility is gradually recognized by the subsequent accounting profession.

American Accounting scientist Sheffield noted that in the late nineteenth Century in England, some auditors were often sued by investors after the bankruptcy of enterprises. Most of the lawsuits were caused by auditors' unqualified opinions on financial reports that overestimated assets and earnings.

For similar reasons, the accounting profession in the United States began to discuss the principle of prudence at the beginning of this century. However, the general concern of the conservatism principle is that after the great crisis of 1930s, people realized that the flood of accounting reports that boasting profits and whitewashing prospects before the great crisis had led to the "blind optimism" of all aspects of the economy, which was an important reason for the great crisis, and the position of robust thought was finally established.

(two) the uncertainty of enterprise's economic activity is the objective premise of the principle of robustness. There are many uncertainties in the modern market economy society. This uncertainty is generally external uncertainty and internal uncertainty.

External uncertainty refers to the uncertainty that results from the generation of a system (or economic entity). It mainly refers to the uncertainty of the market and the uncertainty of the environment, such as the speed of development of science and technology, the supply and demand of the market, the preferences of consumers and so on, which belong to the uncertainty of the market. However, the change of the natural environment and the adjustment of the national macroeconomic policies are the uncertainties of the environment.

Internal uncertainty refers to the uncertainty that affects the normal operation and operation performance of a system within its own scope, such as the revision of various management systems within the enterprise, the changes of the insiders, and the quality of employees.

The economic activities of any unit inevitably involve economic relations with the state, other units and individuals. The external uncertainty and internal uncertainties affect the economic activities of the enterprises to a certain degree, and the enterprises must face both the opportunity and the test, thus requiring the accountants to estimate and judge the results of these economic activities, and the conservatism principle is a way for the accountants to protect themselves in the estimation and judgement.

(three) providing reliable accounting information is the external power generated by the principle of prudence. The so-called relevance is that accounting information can help users predict the outcome of past or present events, confirm or correct previous expectations, and thus have the power to influence decision-making.

Accounting information must have predictive value, feedback value and timeliness.

The relevance of accounting information involves different users of report information.

As shareholders, they will not sit idly by when their market risks exist. They will strictly distinguish between investment repayment and investment returns, and require enterprises to hold a firm attitude in determining profits and assets valuation.

As creditors of enterprises, what they demand is the ability of practical repayment and the robustness of the calculation of enterprise profits.

As a country, it also hopes to "accumulate wealth among the people" and maintain the productive capacity and profitability of enterprises.

In the traditional historical cost accounting mode, the entry value of the assets is recorded according to the actual cost at the time of acquisition, which is reliable and verifiable.

However, with the continuous change of accounting environment, the book value of assets often deviates from the actual value. If it is still priced at historical cost, it will seriously distort its financial position and business results, and of course, it is not related to the needs of users of accounting information, or even mislead users of accounting information to make wrong decisions.

In order to overcome the defects of historical cost, fair value has been adopted gradually in China.

However, in the imperfect market economy, fair value has a fatal flaw in low reliability, so it can not be widely applied in China's accounting field.

Based on this, the accounting profession proposes to adopt a variety of measurement attributes in the historical cost accounting mode, such as current cost, current market value, net realizable value and the present value of future cash flow to overcome the lagging nature of information due to historical cost.

At the same time, we should amend the enterprise accounting standards and further improve the enterprise accounting system, such as redefining assets: assets are economic resources owned or controlled by enterprises, which can be measured in money and can bring future economic benefits to enterprises.

Therefore, any economic resource that is not expected to bring economic benefits to the enterprise is not in line with the definition of assets and belongs to the impairment of assets. When preparing the balance sheet, it should be excluded from assets so that the assets value reflected in the balance sheet is consistent with the actual value of the asset.

If value-added occurs, it is not shown in the accounts.

As a result, asset impairment accounting will only be generated without asset appreciation accounting.

This is actually a prudent approach to provide reliable accounting information to users of report information.

Impairment accounting does not mean that management can change the number of accounting statements arbitrarily. Moreover, impairment accounting does not necessarily reduce the reliability of accounting information, because it is better to eliminate the truth than to make false assets full of statements and make false prosperity. On the other hand, information users, especially the majority of stock investors, expect financial reports to provide them with useful accounting information. Asset impairment accounting is not an effective way to improve information quality.

In fact, the nature of the uncertain factors existing in the economic business and matters can be accounted for in the financial reports. The reliability of the financial reports can be improved, and the risks of the uncertain matters faced by enterprises can be revealed, and the correlation of information will also increase.

It is an unquestioned fact that the universal acceptance of the principle of prudence is the international background of the principle of prudence arising from the integration of four principles and international accounting practices.

In the United States, Britain, Canada and Australia, accounting standards have long been reflected.

In France and Germany, the capital of enterprises is mainly provided by banks and other credit institutions to emphasize the application of the principle of prudence.

Moreover, the international accounting standards board (IASC), in the first international accounting standard (IASN011975), regards conservatism as one of the three elements of selection of accounting policies (conservatism, substance over form and importance).

It can be seen that the principle of conservatism has been recognized by all countries in the world and has become an international accounting practice.

Accounting information, as the international language of international investment and financing, needs to be coordinated.

To this end, China's accounting standards are gradually integrating with international accounting practices.

In early 1990s, China began drafting and setting up enterprise accounting standards, and took the prudence principle as a basic principle of accounting recognition and measurement.

Especially after China's accession to the WTO, the rise of high technology and its industry, the expansion of economic globalization and the intensification of international economic competition have led to the growth of uncertain factors. After entering the WTO, the business environment of enterprises will be more uncertain, forcing our country to gradually expand the scope of application of the principle of prudence in recent years.

Such as 1992 only accounts receivable account for bad debts.

In 1998, the "accounting standards for enterprises income" imposed more stringent restrictions on the recognition of revenue. The Ministry of Finance and the Securities Regulatory Commission requested companies listed overseas to expand the scope of asset impairment.

In 1999, the Ministry of Finance and the securities and Futures Commission requested all listed companies to deal with accounts receivable, short-term investments, long-term investments and inventory preparation.

In 2000, the accounting standards for enterprises - contingencies require that the "amount" be reasonably determined and the future "likely to happen" or loss should be reflected in the financial statements (that is, the profits and losses of the current period), but no recognition or benefit is allowed.

In December 29, 2000, the Ministry of Finance promulgated the "enterprise accounting system" to replace the "Limited by Share Ltd accounting system". The enterprise accounting system further expanded the scope of assets impairment (new fixed assets, intangible assets, construction projects and entrusted loans).

Two, the principle of conservatism is reflected in our accounting standards. (1) the valuation of inventory, the appropriate choice of inventory valuation method is very important for truly reflecting the value of inventory.

According to the provisions of China's enterprise accounting standards, enterprises are allowed to use the last in first out method to calculate the cost of issuing inventories, so that the cost of selling and consuming inventories is close to the actual level and matches the current income, which helps to objectively reflect the operating results under the current conditions of enterprises, especially in the case of rising prices, so that enterprises will not be inflated profits due to currency devaluation.

This method also makes the cost of ending inventory far from the present value. In order to reflect the value of inventory completely and truly, the enterprise accounting system stipulates that enterprises should use the lower cost method to calculate the ending inventory.

The lower cost and market price are the amendments to the principle of historical cost.

In the case of inventory valuation, if the market price of the final inventory is lower than the cost, it means that the enterprise will reduce the value of the stock in use or sale or the ability to obtain income, which will cause a certain loss relative to the historical cost.

In order to reflect the value of inventory, it is to replace historical cost with market value, so as to truly reflect the actual value of inventory.

(two) the selection of depreciation methods for fixed assets. According to the accounting standards for enterprises in China, the accelerated depreciation method is allowed within a certain range of fixed assets depreciation methods.

Compared with the straight line method and the workload method, the accelerated depreciation method does not change the depreciation years of fixed assets, nor does it change the total amount of depreciation of fixed assets. It only changes the distribution of depreciation of fixed assets in various years, and raises the rate of depreciation of fixed assets from the earlier mention of fixed assets and the increase in the amount of fixed assets.

In fact, accelerated depreciation has long been widely adopted in the West.

According to the economic attributes of fixed assets, the practical performance of fixed assets is inversely proportional to their use time. It should speed up the compensation of enterprises' cost and expenses, speed up the renewal of technological equipment and improve the production and development capacity of enterprises.

Especially in the case of price rise, the investment in fixed assets can be recovered ahead of schedule, and the loss of time value of money will be reduced due to the rise in prices, so as to achieve the unification of value compensation and physical compensation for fixed assets.

On the other hand, the accelerated depreciation method can reduce the early income of the enterprise accounting books, and increase the later period, so that enterprises can delay the tax payment. It is equivalent to the government providing enterprises with interest free loans for several years to stimulate economic growth. In fact, in the long run, accelerated depreciation method will not reduce the taxable income of enterprises, and enterprises can rapidly improve the productivity and profitability of fixed assets by improving the technology of fixed assets, so as to raise the national financial revenue.

Therefore, accelerated depreciation method not only conforms to the principle of firm stability, but also promotes the economic growth of the whole society.

In the light of the provisions of the enterprise accounting standards and the enterprise accounting system, the sales of goods can only be recognized as long as they meet the following four conditions: (1) enterprises have pferred the main risks and rewards to the purchasers; (2) the enterprises have not retained the right to continue to be connected with the ownership, nor have they implemented the control of the goods sold; (3) the economic benefits related to the paction can flow into the enterprises; (4) the relevant income and cost can be reliably measured by the three enterprises.

Obviously, the recognition of income pays more attention to the economic nature of pactions.

These constraints can be expressed as: when dealing with problems with uncertainties, only when absolute certainty is possible can the revenue be recognized.