Competitive Structures and Conservative Perspectives

Conservatism can be defined as the accounting tendency to necessitate a higher degree of affirmation to recognize good news compared to the rate of affirmation necessary to identify bad news within the accepted accounting principles' flexibility. Conservatism depends on various factors including the existence of a contract between a business unit and other stakeholders, the probability of legal claims' formation, trying to decrease taxes or postpone their payment, preserving interests of the whole society, increasing the quality of financial information, reducing political expenses, decreasing information asymmetry, and competition level. Despite criticisms of conservatism, it has survived in accounting for centuries and it seems that in the last 30 years, its use has even increased. By taking conservative perspectives into account (contractual, legal claims, disciplined demands of conservatism, tax, political expenses, competition in the market), conservatism has advantages in financial reporting which might have been ignored by critics. Competition in the market is one of the important factors in conservative demand, in such a way that by increasing competition in the market, the existing competitors in a particular industry, take up conservatism in financial reporting in order to prevent new competitors from entering the market or secret data from being revealed to the present competitors

Keywords:

Competitive Structures , Conservatism , flexibility , political costs , information asymmetry