Discuss The Assertion That The Fair Presentation Requirements Of Ias1 Will Undermine The Uk’S View Of True And Fair.
Essay Preview: Discuss The Assertion That The Fair Presentation Requirements Of Ias1 Will Undermine The Uk’S View Of True And Fair.
Report this essay
Discuss the assertion that the fair presentation requirements of IAS1 will undermine the UK’s view of true and fair.
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
A legal Residual Clause — This was basically a safety net in a legal document which was there to protect against unexpected Circumstances
Independent Contract
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