Definition of True and Fair Concept
Question:
Discuss about the Financial Statements and Annual Reports TFV.
It is true that, nowadays, the popularity of the true and fair view is increasing continuously. The term ‘true’ stands for the accuracy of the financial statements of the business organizations. It ensures that the financial statements are accurate and also according to relevant reporting framework such as: the IFRS (International Financial Reporting Standards). They are free from the misstatements and do not mislead the users. Along with this, the term ‘fair’ ensures that the financial statements of the business firms are free from the bias. But, the TFV concept has become a major subject of debate because of it has not been delineated compellingly yet. It is not strictly defined in the accounting prose. Apart from this, the true and fair view is a major part of English law. It is essential to accounting as well as auditing practices in the most of the nations. But, according to the Nobes and Parker, it is a concept that is commonly used by the people and therefore not a subject of discussion. By considering this fact, a literature r review is conducted to identify the origins as well as historical purpose of the true and fair view. Furthermore, this paper would also be helpful to show the extent that the Australian regulatory authority for financial reporting give support to the concept of true and fair view.
TFV: Origin (History) and Purpose
The origin and purpose of the true and fair view is not so much clear. There cannot be find any statutory definition of true and fair view. In the views of Vladu, Mati & Salas (2012), the true and fair concept is defined by the accounting standards as well as accounting practices. The concept is supported by legal opinions of Lord Hoffmann (British judge) and Dame Mary Arden (an English judge) in 1983 and 1993. It is a dynamic concept that cannot be inferred by the Court without getting confirmations from the practices as well as opinions of accountants (Vladu, Mati, & Salas, 2012). These practices and views act in accordance with the accounting standards in order to meet the prerequisite of true and fair view in an appropriate manner.
Along with this, the author Walton (1993) states that, the true and fair view is originated from the generally accepted accounting principles (GAAP). The main reason behind it is that, the concept is related to the facts of the financial statements. It ensures that these financial statements are accordingly to accounting standards and principles of GAAP. They are free from the material misstatements and ambiguities as well (Walton, 1993). So, the TFV concept is originated to deal with accounting problems that are caused by the open areas as well as uncertainties initiated in the accounting law.
On the other hand, according to authors Nobes & Parker (1991), the true and fair view was first introduced in the 1948 U.K. companies act. The concept has a legal origin in the eighteen century and also got a legal definition regarding corporate accountability in the twentieth century. It has become a major part of English law. It is used as an essential part of accounting and auditing practices in the United Kingdom. The term is equally used in both public and private sector as well (Nobes & Parker, 1991). Moreover, TFV is used to demonstrate professionalism in the financial statements and reports of the organizations.
Dynamic Nature of True and Fair Concept
Apart from this, in the views of Omorogbe (2009), the true and fair view has been originated from to the Joint Stock Companies Registration & Regulation Act of 1844 (UK). According to this act, business corporations are obliged to prepare true and fair balance sheets. Moreover, the TFV is an integral part to corporate financial reporting commands in the United Kingdome and numerous other English speaking nations of the world. It restricts the deceitful activities of corporate enterprises; and maintains transparency as well as integrity in the financial statements of the companies (Omorogbe, 2009). Furthermore, the author says that it is a legal term that is defined by the Companies Act 1948 (UK). The purpose of the TFV is to improve efficiency in the financial statements of the organizations.
Along with this, in the words of Chambers & Wolnizer (1991), the true and fair view is a prominent part of the accounting standards. It is an integral part of the IFRS and UK GAAP. The author further states that, in past years, the FRC (Financial Reporting Council) has published a statement to oblige the business corporations to present a true & fair view in their financial statements and financial & auditing practices. Along with this, under Companies Act 2006, the auditors of the corporations are legally compelled to determine that the accounts and financial statements of businesses are giving or not a true and fair view properly (Chambers & Wolnizer, 1991). The auditors are also responsible to ensure that the accounts of the businesses are fair and in accordance with the accounting standards.
In the same manner, Caroline & Ann (2008) affirm that, the TFV concept occurred from the Anglo-Saxon accounting traditions. The companies that belong to the continental accounting practice use this concept in the preparation of financial statements. The author further state that, the TFV concept was created in 1844 in Great Britain. The historical purpose of this concept was to fulfill the prerequisite of ‘full & fair’ in the balance sheet and financial statements of the organizations. Moreover, the TFV is not clearly defined in Great Britain’s laws and European laws too. The concept plays a major role to ensure that the financial disclosures of the business firms are useful to make investments decisions accurately (Caroline & Ann, 2008). The TFV concept establishes a strong relation between the internal accounting and the external accounting to remove all the errors of the accounts in an effectual manner.
On the other hand, in the views of Nobes & Parker (1991), the TFV concept is originated for a common purpose. The major purpose of the true and fair concept is to maintain the accuracy, transparency, and integrity in the financial statements and annual reports of the business organizations. Moreover, this concept is also valuable in the accounting and auditing practices of the businesses. It is an optimistic concept that is essential in the preparation of the financial statements of the organizations. The author further affirms that the TFV concept provides the required accounting standards and authorizes financial decisions of the businesses (Nobes & Parker, 1991). On the whole, it can be assumed that, the true and fair view is a legal term and therefore; it is widely used by the business organizations to prepare financial statements, balance sheet, financial notes, financial reports, and audit reports in an accurate manner.
Origin of True and Fair Concept
It is well-known that the concept of true and fair view is a major subject of debate for the people. It is because of there is no specific definition of the TFV concept. Moreover, it does not have any legal definition. So, it is also a major subject of concern that business firms are using or not the TFV concept to prepare their financial statements, balance sheets and annual reports. Apart from this, it is very much clear that, the true and fair view is mainly used in the business organizations of the United Kingdom. But, it is not pretty clear that the Australian regulatory authority is supporting or not the TFV concept in the financial reporting. The views and opinions of the different authors would be helpful to find that the Australian regulatory authority supports (or not) the concept of the true and fair value.
In the views of Deegan, Kent & Lin (1994), a true and fair view is a fundamental requirement of the Australian corporate reporting. The Australian authority supports the TFV concept to improve efficiency in the financial statements of the business enterprises. It has become a part of regulation with the existence of the Victorian Companies Act 1890. According to the Australian Securities Commission (ASC), the TFV is an essential part of the financial reporting as well as auditing of the Australian business organizations. Moreover, the sec. 297 of the Corporations Act bound the business entities to implement true & fair view in order to prepare financial statements and reports in an accurate manner (Deegan, Kent, & Lin, 1994). The Australian regulatory authority gives instructions to show a fair view of the financial statements of the businesses.
In the same manner, Kilgore, Leahy & Mitchell (1999) state that; the Australian regulatory is very strict towards the concept of TFV. The main reason behind it is that the TFV concept is an integral part of the IFRS and GAAP. The accounting standards presented by the TFV act in accordance with the accounting standards of the FRC (Financial Reporting Council). Along with this, finance directors of the Australian firms are responsible to make certain that their financial statements present a true & fair view in the financial reporting and accounting practices as well (Nobes & Parker, 1991). Moreover, the IASB (International Accounting Standards Board) encourages business associations to present a true and fair view in the financial statements of the companies. The IASB makes sure that any amend in the conceptual agenda of the accounting standards will not influence the significance of the TFV in the financial reporting of the business firms. It is incessant and nobody can separate it from the IFRS and GAAP (Kilgore, Leahy, & Mitchell, 1999). For that reason, the Australian business firms should definitely implement the TFV in their financial statements and reporting.
In addition to this, in the views of Salihin, Fatima & Ousama (2015), both GAAP and TFV are enduring as well as dynamic concepts. The Financial Reporting Council confirmed the legitimacy of IFRS accounts in view of the true & fair prerequisite in legislation particularly in sec. 393 of Companies Act 2006. The sec. 393 declares that the financial directors of the companies must approve all the financial statements and accounts if they fulfill all the requirements of a true & fair view properly. Moreover, as declared in the Companies Act 2006, the directors may approve accounts only when they are showing a true & fair view of the financial reports, assets, liabilities, audit reports, financial position, performance and results of businesses (Salihin, Fatima, & Ousama, 2015). The Australian regulatory for financial reporting provides support to the TFV concept to maintain fluency, integrity, and proficiency in the financial statements as well as accounts of the business associations.
Legal Origin of True and Fair Concept
On the other hand, Caroline & Ann (2008) assert that, the concept of true and fair view is still ambiguous. There is not a specific definition of the true & fair view. It does not have any legal definition. There are no such evidences are available those show the implementation of the TFV concept in the financial statements and accounts of the companies. Moreover, it is assumed that, the TFV concept can emerge conflicts between the accounting standard and practices. To reduce such conflicts, IASB has already initiated the concept of IFRS which includes accounting standards for international accounting. Most of the nations such as: the US, Canada, Australia, etc. used IASB accounting standards to maintain transparency and improve efficiency in the financial statements of the businesses (Caroline & Ann, 2008). Therefore, it can be supposed that, the Australian regulatory authority for financial reporting widely emphasis on the IASB standards in preference to the true and fair view.
Apart from this, Nobes & Parker (1991) affirm that, a true and fair view is a widely used accounting standard. It has become an integral part of the accounting and financial reporting. There is no need of specific definition to present a true and fair view in the financial statements of the business associations. It is a common term that is used by the most of the business organizations on the regular basis. But, in the context of Australia, there is a strong relationship between accounting and taxation. So, the Australian regulatory authority supports the TFV concept and generally accepted accounting standards in the preparation of financial statements as well as annual reports (Nobes & Parker, 1991). Moreover, the TFV concept is enforced by the Companies act 2006; and therefore it is a legal term and used by the Australian regulatory to maintain transparency as well as integrity in the financial reporting and financial statements of the businesses. Hence, it can be assumed that, the Australian regulatory environment for financial reporting supports the true and fair view at its higher extent.
Conclusion
On the basis of the above conversation, it can be concluded that, the true and fair view is an important accounting standard. The TFV is also accepted by the IASB, FRC, IFRS and GAAP. Along with this, it is also observed that, a true and fair view has legal opinions and therefore it is considered a legal term by business associations. The TFV concept plays a major role to improve the efficiency and accuracy in the financial statements and reports of the organizations. Moreover, it is also examined that, the TFV concept is getting more attention of the Australian regulatory authority to maintain the lucidity in the financial statements of the business associations.
Caroline, J., & Ann, S. (2008). A true and fair view: harmonization of the accounting. European Journal of Management , 8 (2).
Chambers, R. J., & Wolnizer, P. W. (1991). A true and fair view of position and results: the historical background. Accounting, Business & Financial History , 1 (2), 197-214.
Deegan, C., Kent, P., & Lin, C. J. (1994). The True And Fair View: A Study Of Australian Auditors ‘Application Of the Concept. Australian Accounting Review , 4 (7), 2-12.
Kilgore, A., Leahy, S., & Mitchell, G. (1999). The true and fair view concept: evidence from Australia . Asian Review of Accounting , 7 (1), 96-111.
Nobes, C., & Parker, R. (1991). ‘True and Fair’: A Survey of Uk Financial Directors. Journal of Business Finance & Accounting , 18 (3), 359-375.
Omorogbe, C. E. (2009). RE-EXAMINATION OF A TRUE AND FAIR VIEW OPINION IN THE MIDST OF PECUNIARY CRISIS FOR INVESTMENT DECISION-MAKING. JOURNAL OF RESEARCH IN NATIONAL DEVELOPMENT , 7 (2).
Salihin, A., Fatima, A., & Ousama, A. (2015). Analysis of the true and fair view concept: an Islamic perspective. International Journal of Managerial and Financial Accounting , 7 (1), 38-61.
Vladu, A. B., Mati, D., & Salas, O. A. (2012). TRUE AND FAIR VIEW AND CREATIVE ACCOUNTING CONCEPTUAL DELIMITATIONS BASED ON PAPINEAU`S TREE METHODOLOGY. Annales Universitatis Apulensis Series Oeconomica , 14 (1), 104.
Walton, P. (1993). Introduction: the true and fair view in British accounting. European Accounting Review , 2 (1), 49-58.
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