What does conservatism in financial reporting emphasize?

Conservatism in financial reporting emphasizes the principle of recognizing potential losses as soon as they are foreseeable, while gains are only recognized when they are realized. This practice is grounded in prudence and aims to provide a more cautious approach to financial reporting. By recording potential losses, conservatism ensures that financial statements do not overstate the value of assets and income, which could mislead stakeholders about a company's financial health.

This principle is crucial for maintaining the integrity of financial reporting and helps protect investors and creditors by presenting a realistic picture of the company’s financial situation. The goal is to avoid the risk of overstating earnings and to reflect an accurate assessment of financial performance that accounts for uncertainties and risks.