The Financial Reporting Council (FRC) has published a statement to confirm that the requirement to present a true and fair view remains of fundamental importance in IFRS and UK GAAP, including the new UK standards FRS 100 -103.
The FRC’s statement reflects developments in UK GAAP, legal advice on the true and fair requirement obtained and published in October 2013 and feedback from stakeholders seeking clarity as to the primary requirement to present a true and fair view.
In particular the precedent to the statement was, in October 2013, the confirmation by the Department for Business, Innovation & Skills (BIS) and the FRC that the current legal framework requires the financial statements of companies to present a true and fair view. The confirmation was issued on the basis of the legal opinion received from Martin Moore QC in response to a divergent legal opinion commissioned earlier in 2013 by a group of major investment funds, who argued that substantial legal flaws in IFRS result in accounts produced under international standards being unable to present a true and fair view as required by UK legislation.
BIS and FRC confirmed the legality of IFRS accounts in view of the true and fair requirement in UK legislation, specifically section 393 of Companies Act 2006, as Mr Moore’s opinion confuted the arguments raised by the group of investment funds, and stressed that the overriding objective in preparing financial statements is that of achieving a true and fair view. A detailed analysis of the issues involved has been published by ACCA.
The new true and fair statement
The FRC’s new ‘true and fair’ document highlights the centrality of the true and fair requirement and provides guidance on how that is relevant to accounts preparers, those charged with governance and auditors.
Section 393 of the Companies Act 2006 requires that the directors of a company must not approve accounts unless they are satisfied that they give a true and fair view and the FRC clarifies that the introduction of IFRS in the UK did not change such fundamental requirement, even though the routes by which that requirement is embedded may differ slightly.
Preparation of accounts
The FRC’s statement points out that the relevance of the true and fair requirement in preparing accounts is indicated by the fact that professional judgement should be applied at all stages of accounts preparation, as opposed to mechanically following the accounting standards, for example:
- where there is a choice of accounting policies allowed under accounting standards, ensuring that those selected are appropriate taking into account the circumstances of the company
- establishing accounting policies for items not specifically covered by accounting standards or where they are ambiguous
- making judgements, for example about valuation, aimed at giving a true and fair view
- not using detailed accounting rules as an excuse for poor accounting
- considering what is and what is not material
- giving appropriate disclosures even where not specifically required by accounting standards
- ensuring that significant information is not obscured by immaterial or irrelevant disclosures
- standing back at the end of the accounts preparation process and making sure the accounts overall do give a true and fair view.
For companies reporting under new UK GAAP, both FRS 102 and company law require that directors make prudent judgements in their consideration of accounts, particularly where there is uncertainty.
For companies applying IFRS, IAS 8 requires that financial statements are prudent and neutral, ie free from bias. More emphasis is placed under IFRS on neutrality which is seen as the absence of deliberate manipulation of financial information intended to make its reception by users more or less favourable. The concern in IFRS is that the use of excessive prudence, resulting in the deliberate understatement of assets or overstatement of liabilities, does not lead to useful information and may be conducive to smoothing of the profits.
Substance of transactions
IFRS and new UK GAAP do not contain separate standards that require accounts to reflect the substance of a transaction rather than its legal form where this is different. However, both frameworks include provisions to report information in accordance with economic substance rather than strictly in adherence with its legal form.
The FRC concludes that it would be difficult for accounts to present a true and fair view if form had overridden substance.
True and fair override
In the majority of cases a true and fair view would be achieved by compliance with the accounting standards as the standards are designed to provide for recognition, measurement, presentation and disclosure for specific aspects of financial reporting in a way that reflects economic reality.
However, the FRC’s statement clarifies that, where directors and auditors do not believe that following a particular accounting policy will give a true and fair view, they are legally required to adopt a more appropriate policy, even if this requires a departure from a particular standard. Disagreement with a particular standard does not, on its own, provide grounds for departure from it.
The true and fair override, as noted by the FRC, is enshrined in both FRS 102 and IFRS (specifically IAS 1 Presentation of financial statements) as they require departure from the requirements of a specific standard when compliance would conflict with the objective of financial statements.
Auditors’ approach to true and fair
The FRC statement stresses that auditors are legally obliged, under Companies Act 2006, to state, when giving their opinion on a company’s financial statements, whether the accounts, in their opinion, give a true and fair view.
It is therefore necessary for auditors to discharge their legal and professional responsibilities and that they should stand back as they approach finalisation of an audit and consider whether, considered as a whole and in light of the issues identified during the audit, the accounts do indeed give a true and fair view.
You can see more on ACCA’s Technical Advisory webpages.
Article contributed by ACCA