The Fair Presentation Requirements of International Accounting Standard 1 will Undermine the UK’s View of True and Fair
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During the last 20/30 years there has been an increase in trade and communication. It is easier for people to do business across the world as the new technology allows this to be possible. The problem with this is that different countries have different ways of accounting standards, and therefore there is a problem on how to account standards. Hence, during the last years the debate on whether to use Fair presentation or the True and fair View is becoming a major concern. Fair presentation and the true and fair concept may seem as a similar concept, however, they do differ as well. While the former is the concept for United States, the latter is used in the UK, EU, Singapore, Australia and New Zealand.
The IASB job is to prepare a “high quality global accounting standard that requires transparent and comparable information in general purposes financial statements”. According to the International Accounting Standard Board (IASB) the fair presentation is the concept which should be used, while the UK’s company act believe it’s the true and fair view ( TFV). The latest version of International accounting standard (IAS1) was brought into action from July 1998. This adopted both concepts, and it “required fair presentation and disclosure of compliance with IAS and a limited true and fair view override if compliance is misleading”
. Fair presentation comes from the word GAAP (Generally accepted accounting principles) and first appeared in 1939. “Fair presentation requires the faithful representation of the effects of transactions, other events, in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the framework.” and can be defined as “ Presenting information, including accounting policies, in a manner which provides relevant, reliable, comparable and understandable information”.
On the other hand TFV was first introduced in the UK in 1947, and since then no one knows its exact definition as the term can be said to be dynamic, however, during the years different people have come up with different definitions
The TFV from 1947, until 1970 didn’t be a major issue, however, once it was introduced into he fourth EU company law directive it started gaining interest. The TFV concept was used in other countries; hence each country would define TFV in accordance to their language and culture, which makes TFV distinct in each country.
This distinction of the meaning True and Fair View is used by US accountants to discourage the use of TFV and to encourage fair presentation, as they say that if True and Fair View has a different meaning in each country, this will not be a good accounting standard if one was to trade with another country.
As said before no one could give an exact definition of TFV, however in 1991 Walton identified TFV as three different themes
1 A legal Residual Clause – This was basically a safety net in a legal document which was there to protect against unexpected Circumstances
2 Independent Contract
3 Generally accepted accounting principles (GAAP) – It ensures that the auditor can make an accurate financial statement for the company.
There are a few more definitions of true and fair view, however, it has been decided that the courts must come up with a set definition.
Under the companies act there is an override obligation to prepare accounts according to accounting standards. Most UK companies will use the UK company act, however, those using the IAS standard will be subject to the EC’s IAS Regulation. In 2004 the IAS published a law, which changed the companies Act. It stated that a note should be made that the accounts have been prepared in accordance with IAS.
This created a problem in the Act as the true and fair view concept, which had been in use for over half a century, was loosing a lot of credibility.
Before 2005 there were only 350 publicity listed companies which used the international financial reporting standards (IFRS), however, due to the requirements of preparing IFRS this number increased to over 7000 companies.
Companies that use IFRS have different ways of working then under the company’s act. If using the IFRS, we have to produce financial statements that present fairly a company’s financial position, while, under the company’s Act, companies have to produce a fair statement as well as a true one.
As mentioned before in each country the true and fair view tends to differ, as each country have different social, cultural, political and economic roots. However, if the term true and fair view and present fairly have different meanings this might allow an expectation gap to produce, (An expectation gap is the “difference between the expectation users have of general purpose financial statement, quality and meaning, and the quality and meaning of general purpose financial statements the accounting profession prepares” .If countries have different meanings of TFV, this could be inappropriate for a suitable accounting standard
.On the other hand, the TFV concept has been used for over 50 years and there hasn’t been any problem with the accounts, hence, it is unreasonable to say that the fair presentation is a better concept, as if the TFV was being used for more than 50 years, Why would Uk shareholders want to change to fair presentation?
In 1998 McEnroe and Martens made a survey on both UK and US shareholders on whether they preferred the fair presentation or the True and Fair View. The results of this survey surprised me as I believe the Fair presentation is a more respectable concept as it adheres to 100 percent of uk law, while the True and Fair View concept allows escaping the law, in order to provide a faithful representation. However, the results of the survey surprised me as the preference of both US and UK investors was the True and Fair View concept, and there was also proof that “when the language for the standard unqualified audit report is prescribed investors in both countries tend to be indifferent to the exact phraseology”
. Under the IAS the term fair presentation is made with accordance to the International Financial Reporting Standards (IFRS), Under the company’s act the true and fair view don’t have to account standards according to the IFRS, however, the UK law obliges UK companies to produce a true and fair View in agreement with international standards, hence, both concepts have similar characteristics at first. As well as both concepts having to work with international standards, we can clearly see that both concepts have a similar word: Fair.
Different accountants have different interpretations of the word Fair. Some accountans like LEE( 1982) and Rutherford (1985) believe true and Fair is one general policy, and you can’t brake it into two words.
The word fair might vary from each country, as not everyone has the same views of what fairness means. However, I believe Fairness means interpreting our data with a more honest and impartial view. After analysing both fair presentation and the True and Fair view concept, my opinion is that both these standards are similar to a certain extent as while preparing the financial statements, many key measures are similar. Also, we know that both these concepts are being used since more than 50 years, and in some countries , like New Zealand, nowadays companies are using the IAS standards but have had many generations of using the True and Fair View. Using evidence from the professional accounting body in New Zealand which states that “The purpose of financial reports is to fairly reflect or to provide a true and fair view of an entity’s performance, position and cash flows”, this gives me the proof of what I believed at first, that both concepts are interchangeable, and hence have the same meaning.
On the other hand Fair presentation and TFV can be said to be different. As mentioned before fair presentation must be 100 percent in accordance with the law while the TFV is allowed to escape the law.
We know that Fair presentation is derived from generally accepted accounting policies (GAAP), and that US accounting is more based on technical compliance. This tells us that a fair presentation is meant to be given, as it has to be complied by the law. A perfect example of this failure of technical compliance is given by Enron. Enron passed all their financial health bills before being involved in a financial scandal and ending up bankrupt. Hence, we can see that fair presentation in some cases can be vulnerable, as the financial preparers of Enron found a loophole around the law and managed to escape a fraudulent situation, without being criticised as they are not liable to the law. Alternatively, according to the TFV concept, firms are allowed to override the law if they are fair and honest while preparing their financial statements. This is positive for shareholders who represent the majority of people in a firm, as it protects them from fraud and from loosing out in a lot of money.
As we know from what is written above, Fair presentation and TFV have different but yet similar characteristics. Some accountants like Alexandra and Archer believe they don’t mean the same thing, while other accountants such as Lee and Rutherford believe that both concepts are interchangeable. My belief is that the TFV concept at this moment is a better concept to choose from, as it represents integrity, honesty and an impartial statement, even though before I thought Fair presentation was a better concept.
Also, my belief is that TFV is a better concept to choose from, as it allows escaping the law if it is fair action, while if we use Fair presentation, a company has to produce its statements 100 percent in accordance with the law.
However, in the last few years the International Accounting Standard Board has become more known of. After 2004 where UK firms had to write a not saying they have used IASB standards, my opinion is that the TFV will slowly loose confidence. This belief is because if countries which use TFV have to now use IAS standards, they will eventually use Fair Presentation: an example of this is New Zealand.