... in recognising good news and bad news. The above example illustrates that bad news is incorporated in to earnings more completely and timely than good news. It is therefore possible to establish that the underlying principle behind Basu's prediction is that of conservatism. Conservatism as Basu states has influenced accounting practice and theory for centuries. Basu lists some important conservative accounting principles in his paper. FASB and ARB are both accounting policies that result in a greater probability of timely accounting recognition of bad news than good news. There are many alternate views on conservatism; these will affect how and to what extent bad news and good news is recognized and reported in earnings. Basu implies that conservatism has a pervasive influence, suggesting the preparation of audited reports and emergence of conservatism has attempted to prevent managers exploiting their asymmetrically informed position. For example, If managers compensation is linked ...

See this essay or coursework document in full right now