FRC paper follows concern about the relationship between “true and fair” and International Financial Reporting Standards
The Financial Reporting Council (FRC) – the UK’s lead corporate governance and financial reporting regulator – has today released a paper (the Paper) reaffirming the importance of the “true and fair” view in both UK Generally Accepted Accounting Principles (UK GAAP) and in International Financial Reporting Standards (IFRS).
The Paper, issued by the Accounting Standards Board and the Auditing Practices Board (two arms of the FRC), can be read here.
The chairman of the Accounting Standards Board explained the purpose of the Paper in the following terms:
“The concept of true and fair has underpinned UK GAAP for many years. Concerns have been raised about the relationship of true and fair to IFRS in some quarters, not least in evidence to the recent House of Lords Economic Affairs Committee inquiry into audit market concentration. The purpose of our paper today is to remind both preparers and auditors that the true and fair requirement remains of fundamental importance in both UK GAAP and IFRS”.
We discussed the House of Lords Economic Affairs Committee inquiry referred to in this post. As we report in that post, the House of Lords Committee is critical of the adoption of IRFS and the more rules-based approach of IFRS compared to previous accounting standards, which “leave less scope for the auditor to exercise prudent judgement”.
The Paper and expectations of accounts preparers and auditors
The introduction to the Paper explains that:
“Section 393 of the Companies Act 2006 requires that the directors of a company must not approve accounts unless they are satisfied they give a true and fair view. The true and fair requirement has been fundamental to accounting in the UK for many years. It is a requirement of both UK and EU law.
The introduction of IFRS in the UK did not change the fundamental requirement for accounts to give a true and fair view. Indeed, for the avoidance of doubt, the FRC obtained an Opinion from Martin Moore QC in 2008 [which can be read here] which confirmed that the true and fair concept remains paramount in the presentation of UK company financial statements, even though the routes by which that requirement is embedded may differ slightly. The Opinion also confirms that fair presentation under IFRS is equivalent to a true and fair view.”
The opinion referred to above, Michael Moore noted the gradual shift over time to more detailed accounting standards and stated:
“It does not follow … that the preparation of financial statements can now be reduced to a mechanistic process of following the relevant standards without the application of objective professional judgement applied to ensure that those statements give a true and fair view, or achieve a fair presentation.”
The Paper emphasises the importance of professional judgement at all stages of the preparation of accounts. The Paper discusses:
- the role of prudence;
- the importance of reflecting the substance of transactions;
- true and fair accounting standards; and
- the approach to be taken by auditors
and concludes that the Accounting Standards Board and the Auditing Practices expect preparers, those charged with governance and auditors:
- “Always to stand back and ensure that the accounts as a whole do give a true and fair view;
- To be prepared, albeit in extremely rare circumstances, to consider using the true and fair override; and
- To ensure that the consideration they give to these matters is evident in their deliberations and documentation.”
More information on the FRC’s recent initiatives on financial reporting can be found in our “Reporting and Accounts” category.
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