Conditional conservatism: a study based on economic variables

Abstract

Accounting from an information perspective looks at the usefulness of that information. Conditional Conservatism is linked to the trend for accounting to require a higher degree of good news verification before disclosing it in the income when compared with the degree of bad news verification. In view of concerns with accounting information quality, this article aims to review the reflection of Conditional Conservatism in accounting income, based on economic variables. The study uses the Reverse Model of Associated Profit to Returns (BASU, 1997) and the model proposed by Kahn and Watts (2009), which examine the relation between accounting profit variables and economic return, using positive and negative returns as a proxy for good and bad news, and other variables widely accepted for the evaluation of conservatism. Therefore, statistical models were estimated for a sample of 96 companies from 2005 to 2007, based on annual information available in Economática® and data reported in explanatory notes. To select an economic event that may influence the asymmetric recognition of economic income, the researchers decided to compare results between companies listed on Bovespa's governance levels and other companies. The obtained results confirm the hypothesis on the use of conditional conservatism among sample companies for income measurement purposes. The positive differences in the degree of conservatism for companies adhering to governance levels are not conclusive, as the models showed scattered results. The economic variables offer advantages when the bad news may not be as clearly visible in the financial statements, which may reduce expected future results.