- Larry Airlines owns inventory that has experienced a decline in market value. In adherence to conservatism, the company chooses to value the inventory at the lower of cost or market value. This results in a write-down of the inventory to reflect its reduced market value, aligning with the principle of prudence.
- Portis Ltd. has a history of significant product returns applies the conservatism principle in revenue recognition. Instead of recognizing the full sale amount immediately, the company may choose to defer the recognition of revenue until the return period has lapsed, and the likelihood of actual returns is reasonably assured. This approach reflects a conservative stance on revenue recognition.
- Suzuki Ltd. holds long-term assets such as machinery and equipment. Due to technological advancements, there are indications that the carrying amount of these assets may be impaired. In accordance with conservatism, the company conducts an impairment test, recognizing any impairment loss to reflect the reduced recoverable amount of the assets.
- Reliance Ltd. is involved in a legal dispute, and the outcome is uncertain. Following the conservatism concept, the company recognizes a contingent liability in its financial statements if the likelihood of an adverse outcome is probable and the amount can be reasonably estimated. This ensures that potential legal losses are acknowledged in a timely manner.
Conservatism Concept : Uses, Importance & Examples