The concept of the 'true and fair view' remains a cornerstone of financial reporting and auditing in the UK despite the adoption of international financial reporting standards, the Financial Reporting Council has said. Auditors of the published accounts of companies are required to form an opinion as to whether the accounts they audit show a ‘true and fair view’ of the organization's affairs. This is an important concept in the UK and may be used as an override even where a company has complied with all legal requirements. Despite its importance there is no legal definition of the expression. The meaning of ‘true and fair view’ develops over time as accounting standards are issued and new accounting issues are debated.
Purpose and scope of the Statement of Principles
The purpose of the draft Statement of Principles is to define the principles that should underlie the preparation and presentation of general purpose financial statements. It also provides the conceptual underpinnings for preparing future accounting standards. The Statement comprises the following eight chapters:
1 The Objective of Financial Statements.
2 The Reporting Entity.
3 The Qualitative Characteristics of Financial Information.
4 The Elements of Financial Statements.
5 Recognition in Financial Statements.
6 Measurement in Financial Statements.
7 Presentation of Financial Information.
8 Accounting for Interests in Other Entities.
The ASB believe that the draft Statement will assist preparers and users of financial statements, as well as auditors and others, to understand better its approach to formulating accounting standards. It should also help them to understand better the general nature and function of information reported in financial statements.
It is important to remember that the Statement of Principles is not an accounting standard and, therefore, does not prescribe how financial statements should be prepared or presented.
The draft Statement focuses on the financial statements that are either intended to give a true and fair view of the organisation’s financial performance and financial position or are intended to be consistent with financial statements that give such a view. This includes annual and interim financial statements, as well as preliminary announcements and summary financial statements.
Relevance of the Statement
The draft Statement is primarily designed to be relevant to the financial statements of profit-oriented organisations including those in the public sector, regardless of their size. However, it could also be relevant to not-for-profit organisations if some of the principles are re-expressed or their emphasis changed. A separate paper on not-for-profit entities and the Statement of Principles is to be issued in due course.
The draft Statement recognises that the concept of a true and fair view is fundamental to the whole system of financial reporting. An example of this is its insistence on relevance and reliability as the main indicators of the quality of financial information. The concept of a true and fair view is considered to be the ‘ultimate’ and lies at the core of all financial reporting. It is regarded as the ultimate test for financial statements and, as such, has a direct effect on accounting practice.
Financial statements will not give a true and fair view unless the information they contain is sufficient in quantity and quality to satisfy the reasonable expectations of the readers to whom they are addressed. These expectations change over time and the ASB seeks, through its accounting standards and other pronouncements, to respond to these expectations.
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