What is meant by “true and fair view” (and oh, by the way, do the standard setters actually know what they are doing?)?

  • By Andrew Guntert
  • 16/12/2013

I assume the answer to the second question must surely be 'yes of course' but I am having increasing difficulty understanding what is meant by a true and fair view because there seem to be increasingly more of them!!

It's always been difficult to know exactly what is meant by a true and fair view but broadly, complying with relevant accounting standards and with company legislation, should deliver it other than in exceptional circumstances. I am though beginning to get confused as to what it is, or should I say as to the range of possibilities?

As a simple example imagine a small company owning a couple of investment properties. Perhaps it has an income of a couple of hundred thousand pounds, employs half a dozen staff and has assets (mainly investment property) of about £1m. It qualifies as a small company and chooses to use the FRSSE. FRSSE 2008 (and indeed the currently proposed FRSSE 2015) requires the properties to be revalued each year to market value and valuation differences go to a revaluation reserve. There would be no provision for deferred tax unless there is a binding commitment to sell the asset at the balance sheet date. Compliance with the FRSSE is required for the accounts to show a true and fair view.

Now that the micro-entity provisions are available, such a company could choose to adopt them (2 out of 3 criteria, turnover less than £632,000 and fewer than 10 employees). If it did so it would be prohibited from revaluing the investment properties and they would have to be shown at depreciated cost. BIS and the FRC tell us that these accounts would (still??) show a true and fair view, only it's a different true and fair view!

If the company wished to do so it could alternatively adopt FRS 102 early. In which case investment properties would be revalued to fair value each year (generally the same value as market value but theoretically it could be different) and the differences would be taken to the profit and loss account for the year (though an unrealised profit). The profit would be rather different for the period, and the net assets would be very very different as a result of an obligation to provide for deferred tax on the revaluation timing differences! And yet this would also apparently give a true and fair view? In passing I might mention that there is also a possibility of leaving the properties at depreciated cost (where fair value cannot be measured reliably without undue cost or effort!)

I could also (but won't) describe the wide range of acceptable alternatives available on implementation of FRS 102 again each of which would apparently show a true and fair view!!

And of course the poor auditor is attempting to acquire sufficient appropriate audit evidence that the accounts show a true and fair view! Good luck!!

I always have this dream of an over-arching super intelligence ensuring that accounting standards and company legislation provide appropriate, sensible and consistent rules and messages - dream on!!!!!

This Blog is incidentally very much my personal view and not necessarily those of Mercia but we would be very interested to see what comments you might have on what I have written - so please go ahead and comment!! And a Merry Christmas and Happy New Year to you!!

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