Concept of ‘True and Fair view’ in Financial accounting

Presented by – - Joel Lopes- Prashant Gonsalves

The phrase can be broken into two parts viz. True & Fair view

True• True can mean in

accordance with the facts.

Fair View• Fair View has many

elements – accordance with exceptions, relevance, informational needs, concordance with accounting purposes (reporting), objectivity, freedom from bias, disclosure & materiality.

Meaning of ‘True and Fair’

• The expression ‘true & fair view’ is an abstract idea of immense importance & difficulty.

• It is the principle that is used in guidelines ranging from auditing and financial accounting .

• It is used to describe the required standard of financial reporting but equally to justify decisions, which require a certain amount of arbitrary judgement making.

• A true and fair view is not a guarantee, but an opinion

• It is an idealistic aim for preparers of financial statements to strive for.

DefinationHow can the accountant be sure that the statements show a true and fair view, especially when there is no precise definition??

There are many definitions and explanations in the Statement of Principles, but they are qualitative rather than specific measurements.

A ‘True & Fair view’ is a companies act concept and is therefore a legal notion. However, neither the companies act, nor the court have ever attempted to define it. They do give some specific attributes: -• Authority: all transactions are official and above board.• Accurate: all information provided is accurate, e.g. sales invoices give full

details of vat, discount, and amounts payable• Complete: there should be no missing dockets in the accounting system.

If the accounts hold the above qualities, they are likely to give a true & fair picture.

ObjectiveIt will be said that the financial statements and the books of account show true and fair view of the business when the following conditions are fulfilled: -

• The books of account have recorded all the business transaction correctly.

• The books of account have been prepared according to the accepted principles of accountancy and have followed accounting standards issued by different regulatory bodies.

• There are no errors and frauds present in the books of account. • The financial statements that have been prepared by the company are in conformity with

the books of account.

• In the preparing the financial statements, all mandatory provisions of companies Act and other relevant laws have been followed.

When all the above facts are taken care by a concern in preparing the financial statements, it will be said that these statements show true and fair view of the affairs of that business concern.

To support "true and fair view“ expression, accounting has adopted certain concepts and conventions which help to ensure

that accounting information is presented accurately and consistently

Accounting Concepts

• Going Concern• Consistency• Prudence• Accruals (Matching)

Accounting Conventions

• Monetary measurement• Separate entity• Realization• Materiality

Does one small error mean that the accounts don’t show a ‘true and fair’ view?

• It is not a precise science; instead it is based on objective and subjective judgements depending on the familiarity with the organisation. The accounts can be manipulated in many ways. The more experience management/accountant has the easier it is for them to hide transactions.

• There are inherent risks in each accounting system, or there might not be a system of control at all so detection of fraud is almost impossible. Limited sampling means the auditor can only be ‘reasonably happy’ with the accounts and if he is, his opinion will be that they give a ‘true and fair’ view.

Does following financial statement give true and fair view??

• During the process of audit you have found that M/s K M Knitwear has purchased one Honda Civic car of Rs. 18 Lacs and entry has been passed as expenses in to the profit and loss account.

Ans. NO, here the Honda Civic car is fixed asset which should be shown as fixed assets in balance sheet and not as expenses in the profit and loss account. Only depreciation is allowed as expenses. Here the profit is under valued by amount of Rs. 18 Lacs.

Example 1

Does following financial statement give true and fair view??

• Secured loan received from state bank of India amounting Rs. 75 Lacs shown as unsecured loan.

Ans. In this case readers might assume that the loan acquired is free from any charge or mortgage. But it is not in reality. So financial statement does not give true and fair view.

Example 2

True and fair and accounting standards

True and fair is not something that is merely a separate add-on to accounting standards. Rather the whole essence of standards is to provide for recognition, measurement, presentation and disclosure for specific aspects of financial reporting in a way that reflects economic reality and hence that provides a true and fair view.

The approach to be taken by auditors

• The main object of audit is to find out whether the financial statements prepared by a company show the true and fair view of the financial state of affairs of a company and if not then in what respect they are not showing.

• The obligations of an auditor when giving an opinion on a companyʹs financial statements are set out in Companies Act. Those obligations include – Stating whether in their opinion, the accounts give a true and fair viewAgainst that background, it is clear that if auditors are to discharge properly their legal and professional responsibilities. They should stand back as they approach finalisation of those accounts and consider whether in view of the issues that they have addressed in the course of the audit, the accounts do indeed give a true and fair view.