Accounting Conservatism: A Literature Review

Accounting conservatism is one of the most important properties of financial reporting. The goal of this article is to gain a better understanding of accounting conservatism. We explicate the evolution of conservatism over its long history. Accounting conservatism is indispensable because the main parties of a firm demand conservatism to mitigate agency costs. Various methods are used to measure accounting conservatism, which include balance sheet measures, income statement measures and earnings/stock return relation measures. Empirical research into accounting conservatism has flourished over the last two decades and we focus on the cross-sectional and time-series variations in conservatism. We conclude that accounting conservatism is important and cannot be excluded from accounting standards. We review accounting conservatism according to four dimensions. What is accounting conservatism? Why conservatism is important? How can conservatism be measured? What are the economic consequences of conservatism? We conclude that accounting conservatism is important and cannot be excluded from accounting standards.