To understand the role of prudence in the preparation of financial statements and whether and in what form it should be considered as a qualitative characteristic, we should first grasp the concept of prudence also known as conservatism. The IFRS defines prudence as ” the exercise of caution when making judgements under conditions of uncertainty “. When the IFRS states ” the exercise of caution” it is refereeing to the action of making sure that assets and income are not overstated, and liabilities and expenses are not understated, as either of which lead to the overstatement of profit. This works the opposite way as well. In this essay, I will be critically assessing the role of prudence in the preparation of financial statements in the form of negating biased information, making sure the information is kept neutral and faithfully represented. I will be discussing its trade-off with comparability and the effective of this on its usefulness when preparing financial statements. I will also be analysing whether the role of prudence in the preparation of financial statements is already served by the concept of neutrality. I then will be evaluating prudence to determine if it’s role in the preparation of financial statements will be sufficient enough for it to be regarded as a qualitative characteristic. One key role of prudence in the preparation of financial statements is that it makes sure the financial information does not contain biasness. Prudence finds the perfect balance between optimistic and negative bias that could be implemented in the financial information. For example, the management team could greatly emphasize the financial information to show greater performance to earn bonuses. Such incentives would be made possible without the existence of prudence. This is further supported by IASB member Cooper, S (2015, p.2) who states that ” Management teams making accounting estimates are subject to many incentives that could lead them to favour either an overstatement or an understatement of financial position and financial performance “. As such financial information could be subject to bias and hence not be reliable. This is again backed up Ross L. Watts (2003, p. 4) “Conservatism constrains managerial opportunistic behaviour and offsets managerial biases with its asymmetrical verifiability requirement”. This has also a great effect on the relevance aspect of financial information, as the threat of bias existing means that the financial information would not be deemed reliable or relevant. Thus, financial statements would lose both its predictive and confirmatory value. Meaning that the investors using the financial statements to make decisions on potential investments will suffer from having biased information to base their decision on and suffer the consequences of these decisions. This is again supported by Cooper, S (2015, p.2) ” For investors using financial statements to make decisions on their investments, any deliberate over- or under-statement is likely to lead to suboptimal decisions and a misallocation of capital”. Therefore, prudence plays two key parts in the preparation of financial statements under the form of neutral and relevance. These two key parts makes sure there is no systematic bias and that the information provided is not only relevant but also, faithfully represented and in turn reliable. This will lead us to state that prudence should be regarded as a qualitative characteristic. We have come to understand that a key role of prudence in the preparation of financial statements are faithful representation. However, this comes with the trade-off of comparability. It is important that financial statements can enable users to compare the performance of their company with previous year performances and its competitors. If we take the definition of prudence by the IFRS as stated above, “the exercise of caution” will be different for different professional investors. This is illustrated by the association of charted certified accountants (ACCA, p. 3) “Chartered Financial Analysts (CFA), want management to report the actual results in a transparent manner that is not biased but neutral to both good and bad news. Where there are uncertainties they would like management’s best estimate with the appropriate disclosures of the basis on which this has been made.”. With the different professional investors wanting mangers to report in specific ways, then comparability of financial statements between firms would not be made possible due to the lack of consistency when it comes to the methods used when recording financial information. As such, the usefulness of prudence in the preparation of financial statements would come at the cost of comparability. Therefore, due to neutrality being able to serve some roles of prudence in the preparation of financial statements, we would choose to not include prudence as qualitative characteristic due to trade off with comparability. Another key role of prudence in the preparation of financial statements is its reliable form of reporting past financial transactions and operations. However, prudence is only reliable in recording past events such as the recognition of bad debts. Nonetheless, accounting standards have changed over time and are now more future focused. Hellman, N (2008, p.72) backs this up by stating that ” the need for conservatism is often linked to a reliable reporting of past events, which implies that stewardship and the feedback function of accounting is emphasised. Over time, the international accounting standards have become increasingly future-oriented, pointing out decision usefulness as the primary or sole objective of accounting”. This means that for financial information to be useful in the decision-making process of the users, it does not only need to contain confirmatory value, but also, predictive value. This can again be backed up by the removal of prudence in the IASB conceptual framework in 2010 and Matthew R Garrison who wrote a thesis on “Conservatism in accounting” where he states that conservatism (2015, p. 4) ” in today’s environment it is no longer a necessary or correct principle due to changes in corporate finance and users of financial statements.” Which shows that accounting standards are changing with time. Therefore, prudence makes sure that financial information has confirmatory value which would be deemed good enough to be qualitative characteristic in the past but as accounting standards are merging towards future focused reporting and decision making, it is essential that it contains both predictive and confirmatory value. Hence, prudence would not play a sufficient role in the preparation of financial statements and would not be regarded as qualitative characteristic of accounting information. One may argue that prudence serves no useful purpose in the preparation of financial statements due to the concept of neutrality already serving its purpose. The IFRS new definition of prudence as “Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when making judgements under conditions of uncertainty. The exercise of prudence means that assets and income are not overstated and liabilities and income are not understated”. The definition introduces the concept of prudence as a qualitative characteristic of financial information when such notion does not exist. Prudence as defined is simply stating that the financial information has to be neutral. However, as the concept of neutrality already existing as qualitative characteristic of financial information, then what is there to gain from introducing prudence as a new concept. This does not mean that prudence and neutrality have the same definition or are identical, however both concepts will reach the same end point which is to make sure financial statements are faithfully represented. This is supported by professor Barker, R (2015, p.5) who states that “The problem is that prudence is in substance defined in a way that adds nothing to the concept of neutrality; as defined, prudence essentially means ‘make sure to be neutral’. Given that the Framework defines neutrality already, there is nothing to be gained from the introduction of an additional ‘concept'”. As such the existence of both neutrality and prudence can lead to distortion of data which would damage the effectiveness when used in decision making. Thus, prudence plays no useful role in the preparation of financial statements due to the concept of neutrality already existing. This would mean that it should not be regarded as a qualitative characteristic. To conclude, we have critically assessed the role of prudence in the preparation of financial statements through reducing systematic bias that can occur through managers. Hence, making the financial statement more neutral and reliable, in turn enhancing relevance. We assessed its reliable form of reporting past events and criticised its lack of reliability when it comes to recording future events which has decreased its usefulness in terms of decision-making, as accounting is now more future-oriented. We have analysed how it serves no role in the preparation of financial statements due to the concept of neutrality already serving its purpose and the existing trade-off with comparability. In judgment, we would choose to not regard prudence as a qualitative characteristic due to its lack of usefulness in the preparation of financial statements and its trade-off with comparability.