Conservatism constraint definition including break down of areas in the definition. Analyzing the definition of key term often provides more insight about concepts. Conservatism constraint can be defined as: Principle that prescribes the less optimistic estimate when two estimates are about equally likely. Conservatism constraint basically means we want to error on the side of looking worse. This conservatism constraint assumption can seem unusual but from a regulatory perspective it does make sense because a conservatism constraint limits the possibility of financial statements being presented that are overstated, an overstatement that investors could act on. The conservatism constraint basically means that, all ells equal, we want to pick the assumption that is lower for assets and higher for liabilities, these assumptions making the company look worse or most conservative.
