Secondly, would be justifiable if they hesitate when

Secondly, caution
is useful when it comes to realizing a financial statement considering that the
three main primary users of financial statements are equity market users, debt
market users and corporate governance users (Ruch and Taylor, 2015). This
statement contains relevant information about the position of a business hence
the reason of need for accuracy and attention to detail. For example, whether
as a buyer or a seller, in the equity market, all investors are risk-averse so
it would be justifiable if they hesitate when buying stocks. For the debt market,
the higher the potential for returns, the higher the risk – that is why they thoroughly
analyze the information provided so as to not lose profit. The conservatism principle
is applied on both sides since it could damage the seller’s image and ultimately
affect his future transactions.

Additionally, following the definition by the Conceptual
Framework from IASB pre-2010, which states that financial reporting should “have to
contend with the uncertainties that inevitably surround many events and
circumstances… Such uncertainties are recognized by the disclosure of their
nature and prudence in the preparation of financial statements” (Cooper, 2015), exercising prudence in financial reporting could
indicate a bias towards understatements of assets.

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