TRUE AND FAIR VIEW

True and Fair View - The Legal versus the Accounting Perception

True and Fair View - The Legal versus the Accounting Perception

Introduction

The aim of this study is to explore the concept of true and fair view by comparing the legal versus the accounting perception. Although the directors of companies are required to prepare financial statements which give a true and fair view of their company's financial position and performance, neither legislation nor the courts have explained what is meant by a 'true and fair view'. This has led to conflicting interpretations.

Given the recognition that compliance with generally accepted accounting practice does not always result in a true and fair view, it is suggested that the most appropriate interpretation of the phrase lies somewhere between the literal and the technical viewpoints. This interpretation may be explained by drawing a parallel with a good landscape painting. Such a painting portrays the landscape so 'truly and fairly' that anyone seeing the picture will gain an impression of the scene depicted, similar to the one they would have gained had they been present when the picture was painted. In similar vein, in order to meet the 'true and fair' requirement, financial statements must portray the financial affairs of the reporting entity in such a way that anyone reading the statements can gain an impression of the entity's financial position and performance similar to the one they would have obtained had they personally monitored the recording of the entity's transactions (Walton, 1991, pp. 44-49).

Many of the items presented in financial statements are subject to judgment. As a consequence, in order to provide a good reproduction of the entity's financial picture some conventions or rules are needed to guide and direct the exercise of that judgment. Such 'rules' are embodied in accounting standards and other generally accepted accounting principles. For financial statements to meet the required standard, they must be presented in such a way as to create the 'correct' impression of the entity's financial affairs. In most circumstances this will be achieved through judgmental application of accounting standards to the particular circumstances of the auditee (Puxty, 1998, pp. 23-29).

In the next section the author will examine how the term "true and fair" is used loosely and although there is legal law (company act 2006) in place there is no stationary definition of the term true and fair.

Discussion & Analysis

The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business activities. To support the application of the "true and fair view" accounting has adopted certain concepts and conventions that help to ensure that accounting information is presented accurately and consistently. The most commonly encountered convention is the "historical cost convention". This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost (Parker, 1994, pp. 55-67).

Accounting has played an important role in the advancement of a society and can be considered as a ...