At the very core of financial reporting lies the concept of the True and Fair View (TFV). In many countries the requirement for financial statements to reflect the true and fair view of the entity has been codified in national legislation (such as Australia’s Corporations Act), given prominence in financial accounting standards and the accompanying conceptual framework. Nevertheless, the TFV is not really given prominence in accounting practice or accounting education. It seems to be just one of those things that is accepted and is not worthy of further discussion.
Consider, for example, for following quote given by an accountant to the authors of the paper:
I am fairly sure that in all our discussions with the auditors, and we have had many, the term “true and fair” has never once been used. It is a concept that we all hold in common, and not a matter for discussion (Nobes and Parker 1991, p. 360).
It probably won’t surprise you that I disagree with this sentiment even though I understand it. Much more focus has been placed on the outcome of committing to a “true and fair view”: the conceptual framework and the accounting standards. I am therefore going to give you an opportunity to undertake research into the TFV, its origins and its intent.
The Assignment Requirements
Your literature review, therefore, is to research and report into particular aspects of the TFV. Your assignment is split into two parts.
What is the history of the TFV? How did it come about, where, and when? What has been this historical purpose of the TFV?
Part B provides you with a choice; you may research or report on either one of the following:
- The extent to which the Australian regulatory environment for financial reporting supports the TFV, or
- Whether the current requirements of the Australian accounting standards to “faithfully represent” the reporting entity’s accounts is the same as requiring a true and fair view.
Some links to journal articles will be provided below to help you start your research, but you will have to search much further than that. Your textbook can also provide some useful references, and I urge you to search the Library’s database for useful articles.
You may certainly work with other students to share the research and discuss the best ways to present the report, but keep in mind that this is an individual assignment. So work with others, share notes, and so on, but you must write your own report.
True and fair view can be defined as representation of financial statements and position of the organizations in a faithful way so that it is free from any material misstatements. Literature does not define the true and fair view expression. However, some of the conclusion can be made from both the words. True word is indicative of the fact that financial statements have been prepared by complying with the reporting framework that is applicable such as Australian Accounting standard Board or International Financial Reporting standard and the figures are factually correct so that users are not mislead (Beattie 2014).
On the other hand, fair indicates that the information is represented faithfully without having any element of biasness and rather than reflecting the legal form of transactions, it reflects their economic substance. Directors of companies are responsible for preparing true and fair statements. It must be considered by auditors in the event of providing audit opinion for preparation of true and fair financial statement. Company law of several jurisdictions requires it for auditors to clearly state in their report that financial statements have represented a true and fair view (Blankespoor et al. 2013).
Discussion: Literature Review:
The economy of world has become more internationalized and the work toward international standard is in full progress. Depending upon the accounting standard, the application of true and fair view will differ. True and fair view (TFV) is general and broad concept. An organization is able to provide unbiased information if varying components that affects the intrinsic value, when the reports are being prepared according to true and fair view. The concept of true and fair view is traditionally stemmed from accounting tradition of Anglo-Saxon. Companies belonging to the continental accounting tradition used this concept on increasing basis. The concept was introduced in the year 1844 in Great Britain at the time corporations in the balance sheet were expected to fulfill the requirement of true and fair (Palea 2017). British law for the first time made use of this concept and it was mentioned in the companies Act, 1948. However, there was no clear definition of this TFV concept. Introduction of this concept took place when UK became member of European Union. For quite a long time, TFV was viewed as the cornerstone in the economic disclosure of companies within the tradition of Anglo-Saxon (Cantrell et al. 2013).
True and fair view was started with fourth directive in the European Union and the draft of this particular directive was published in year 1971. All the public and private companies were covered under this directive. German company law heavily influenced the draft and hence there were conservative valuation rules and had limited disclosure of notes along with arranging the formats in rigid details. Later on, it was influenced by Ireland and United Kingdom to have a modified draft by influencing European Union. Such modified draft was issued in the year 1974 (Bloom 2013). This lead to introducing the true and fair view concept. This process continued transmission of financial derivate and consequently in the preparation of financial statement, true and fair view was established as a predominant principle. Companies were required to disclose different and supplementary information by implementation of true and fair view.
True and fair view has uncertainty in their terminology, they should be interpreted, and accountants in one way or another have used such concept. Analyzing the literal meaning of the concept is indispensable as there is not authorized definition of true and fair view. According to changing accounting environment and situation, nature of concept of true and fair view would vary. Most directors in Australia treat true and fair view as equivalent in meaning. There are three aspects perceived by companies regarding true and fair view. First, one is compliance with GAAP and second one is requirement of superior accounting standard over other. The last one is unpredictable eventuality not covered by legislation. It is necessary for financial reports with general purposes depicting true and fair view to comply with GAAP.
True and fair value has a great value comprising of theoretical value that distinguished the cultural dependence of financial and accounting reporting. It also involved the fact of constant development to meet the expectations and needs of shifting economic and social environment. The thing that seems to be true and fair is the question of ethics and moral. The concept was emerged to create a common understanding of use of financial reporting by auditors, prepares and users of the financial statement. Moreover, managers make alternative accounting procedures. This is accepted by shareholders and confirmed by auditors based on compromises of what is fair. As per directives of European commission, the annual report of the company should give the true and fair view of its financial status and position. Companies applying to true and fair values requirement comes from viewpoint of users. TFV should the reality because of its distinguished characteristics. The overriding statues of true and fair view is supported and it is felt by accounting authorities to have some type of insurance against the unfair reporting. Protection against unfair presentation is provided by this and it would guarantee comparability by insistence from auditors (Edwards 2013).
A connection between internal and external accounting was implied by true and fair view and concept of TFV is considered important because not all the accounting questions can be agreed by standards. There are two prevailing approached to the concept of TFV. In first approach, there is a defined standard of unnatural concept and is valid beyond any other accounting rules. Another approach supports other accounting rules, make use of concept of true, and fair view (May 2013). Concept of TFV in US is seen as accounting disclosing real transactions and are informative. Many other countries have invested time in trying to understand the concept and they have not been successful.
International accounting standard (IAS) has prescribed the explanation of fair presentation under which the transactions are interpreted according to recognition criteria and definitions. True and fair view has been referred as presenting fairly under IAS 1. However, in practice weaker meaning of true and fair view can be implied. As per IAS 1, it is required financial statement should give true and fair view of the financial transactions.
In the second part, research will be conducted on the extent to which the Australian regulatory requirement of financial reporting supports true and fair view. The company’s annual financial reporting along with notes to give a true and fair view of its performance and financial position requires the corporation Act, 2001 of Commonwealth of Australia under section 297, it. Under section 296, the obligation is to comply with the accounting standard and the obligation of section 297 should not affect this obligation. In the event of preparing notes and financial statements by complying with the accounting, standards and they are not giving a true and fair view of the position of entities. Mentioning of the additional information under subsection 295(3)(c) of the act must be included (Chen and Schipper 2016). This is used in the notes to financial reporting. It is clearly stated under this sub section that notes to the financial statements are the notes required by accounting regulators and it indicates that they are the disclosures required by regulators along with other necessary information giving true and fair view.
The half year financial report of the companies complies with the equivalent provision of Corporation Act as per section 304 and 305 and sub section 303 (3)(c). Corporation Act 1991 does not include ‘true and fair override’ as it was eradicated from the act (Henderson et al. 2015). The provision led to the formation of subjectively review that effectively allowed the entity to deviate from accounting standards. Formation of viewpoint that is subjective implies that complying with the standards would not lead to true and fair view of the entities financial position.
Companies not dealing with the standards resulted in facing unusual circumstances for some companies and the deterioration in standards promoted the transaction forms about their substance. Organizations were concealing relevant information form the market by departing from aligning to the accounting standards. There was rising inconsistencies, non-comparable results, and resulted in enforcement difficulties. Provisions was amended in response that included compliance of financial statements with the standards and ensuring true and fair view by providing detailed information in the notes (Majercakova and Skoda 2015). However, in most of cases, aligning with accounting standard is certainly possible to give a true and fair view.
Accounting standards issued by IASB (International Accounting standard Board) are principle based, rigorous. A broader trend toward the fair value accounting application is also reflected by the accounting standards. After year 2005, Australia continued to formulate these standards by providing the inputs. Any form over substance issue is addressed rigorously by the input to standard formulation. Such issues might result in obligation to represent true and fair view and accounting standard requirement (Needles et al. 2013).
In light of several deficiencies in the accounting standards, it is of considerable concern to committee that there are conflicting interpretations of application of requirement of true and fair value in the Corporation Act, 2001. Presentation of true and fair view of accounting and firms’ financial position are required to form an opinion by auditors. This is to ensure that whether the report is in accordance with the Act under section 297 and 296 (Palea 2017).
Among the respondents on true and fair view notion, there was a considerable disagreement in the Corporation Act, 2001. It is contended by some submission that compliance with accounting obligations should be the primary obligations and secondary consideration should be relied on true and fair view. It is advised by the Australian institute of Company directors are complying and embracing the accounting standards and this is the predominantly requirement of the Corporation Act and fair and true view is the secondary requirement. It also included that not agreeing with the standard would have true and fair view tended. Some other respondents suggested reverse. It is told to committee by Assurance standard and Australian auditing Board already contains true and fair override (Shalev et al. 2013). If aligning with the accounting standards does not give a true and fair view, there is a need to disclose the extra information.
It is indicated by the committee that there exist a fundamental gap between what is required by Corporation act and audit practice in relation to true and fair view. Financial statement complying with the accounting standard portrays a true and fair view. Accounting standard application should provide expectation that the financial statement presents a true and fair view and reliable statements according to Australian securities and Investment commission (Storey et al. 2016).
Requirement of true and fair value is found in the Corporation Act, 2001 under section 297. The requirement of fair representation of financial statements is referred in the AASB 101 (Australian Accounting standard Board). On the other hand, AUS 15.1 requires a company to prepare financial report in accordance with Corporation act 2001 that requires disclosure of further information for giving a true and fair view (Tucker and Schaltegger 2016). One of the important factor in determining whether the financial report gives a true and fair view is the understandability of disclosures. Accounting standards are developed and designed on the basis for ensuring that proper adherence to standards should ordinarily result in producing the financial statements that would reflect true and fair. However, it is considered inappropriate to conclude that meeting the section 296 requirement would automatically satisfy section 297 requirement that is complying with the accounting standards would lead to fair and true representation (Macve 2015). This can be explained with the help of an example. The effects on the financial statement and on profit measurement arising from the drawbacks in the rules of accounting over share options and leases. It is depicted by this particular instance how complying with the accounting standard may not lead to financial report giving true and fair view.
The concept of true and fair view dos not have any definition that can be generally accepted. It can be concluded from the above discussion that Subjectivity and deficiencies included in the accounting standard interpretation is indicative of the fact that complying with the standards cannot assure a true and fair representation of financial reports. The auditor and directors of the companies that whether they should separately consider true and fair view and accounting standards must separately consider it. In the current scenario, Corporation Act, 20001 does not have any guidance for addressing this issue. In order to meet the true and fair test, Corporation Act should better enunciate this. A separate assessment is required to be conducted for considering whether preparing the financial statements as per accounting standards will lead to true and fair view.
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