In the face of uncertainty, accountants prefer to err on the side of understatement of assets, revenues and gains, and overstatement of liabilities, expenses and losses.

	Inconsistency--When an asset is understated, it will cause and overstatement of income when the asset is used or sold.  If conservatism is based on the preference to understate income, it is inconsistent because income of a future period will be overstated.
	Capriciousness- The extent to which conservatism is followed is a matter of policy by the firm.  The degree to which conservatism is followed varies from entity to entity.
	Concealment-- Although accounting methods are generally known to be conservative, it is difficult for investors to know the degree to which conservatism has been applied.  Conservatism puts the average investor in a disadvantaged position, and gives advantageous opportunity to "insiders."
	Contradiction of accounting principles--conservatism clashes with a number of accounting principles, such as:    Conservative method Principle contradicted Lower of cost or market Cost principle Installment basis of revenue recognition Revenue recognition Expensing of Research and Development costs Matching principle Switching from cost to LCM Consistency principle Understatement of asset values Disclosure principle
	Bias--Conservatism causes a systematic bias in the financial reports rather than a realistic assessment. There can be serious, legitimate questions raised about the usefulness of accounting data based on conservative policies. In A Statement of Basic Accounting Theory (ASOBAT), the AAA states that the presence of bias which may serve the needs of one set of users cannot be assumed to aid or even leave unharmed the interests of others.
	State of mind-- Conservatism is so entrenched in accounting that it has become more an attitude, a state of mind, of accountants, rather than simply a mechanism used in response to uncertainty.

to suffer an actual loss due to an over-optimistic appraisal is more severe than the loss of opportunity for profits due to an over-pessimistic evaluation.

Advocates of conservatism maintain that conservatism continues to be followed in practice because years of experience have demonstrated to accountants that it is a prudent, useful convention in an environment filled with uncertainty.

The FASB, in Concepts Statement No. 2, acknowledges that there is a place for conservatism--meaning prudence--in financial accounting and reporting because business and economic activities are surrounded by uncertainty. The FASB warns that conservatism should be applied with care and that conservatism should no longer connote deliberate, consistent understatement of net assets and profits.

 But in Concepts Statement No. 8, the FASB states that "(qualitative characterestics do)  not include prudence or conservatism as an aspect of faithful representation because including either would be inconsistent with neutrality."  "Deliberately reflecting conservative estimates of assets, liabilities, income, or equity sometimes has been considered desirable to counteract the effects of some management estimates that have been perceived as excessively optimistic. However, even with the prohibitions against deliberate misstatement that appear in the existing frameworks, an admonition to be prudent is likely to lead to a bias. Understating assets or overstating liabilities in one period frequently leads to overstating financial performance in later periods—a result that cannot be described as prudent or neutral."  

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