True and fair view - FRC Paper

A recent paper produced by the Auditing Practices Board and the Accounting Standards Board of the Financial Reporting Council emphasises the importance of the requirement for a company's annual accounts to give a "true and fair view" of the company's financial position. This will be of particular interest to vendors of a company who are usually required to warrant that its last annual accounts give a true and fair view.

The true and fair standard is a requirement of company law (under section 393 of the Companies Act 2006 directors must not approve accounts unless they are satisfied that they give a true and fair view). The FRC's paper stresses that, notwithstanding increasingly detailed accounting standards, and the introduction of IFRS in the UK, it is still a paramount requirement that the accounts should provide a true and fair view.

The paper makes a number of important points:-

• In the majority of cases, compliance with accounting standards will result in a true and fair view. There are however situations where directors cannot merely apply standards in a mechanical fashion. For example, a choice may need to be made between different accounting policies. Also, accounting standards may not clearly address a particular issue, and the director may therefore need to consider whether to apply a policy intended to address a similar issue.
   
• If accounting standards address a particular issue but the answer does not seem to accord with commonsense, then the solution would normally be to disclose properly against the relevant item.
   
• The FRC believes that it will be relatively rare for directors to consider that following a particular policy will not give a true and fair view, but where they believe that this is the case, they are legally required to adopt a more appropriate policy.

The lesson for vendors who are considering whether they are happy to give a "true and fair" accounts warranty is that compliance with accounting standards does not necessarily mean that the accounts give a true and fair view. The vendors should consider whether the directors have engaged properly with the accounting process and undertaken a commensense analysis of whether the accounts give a true and fair view, regardless of the application of accounting standards. There is no statutory definition of what is "true and fair", however the FRC refers in its paper to the concepts of prudence and reflecting the substance of a transaction rather than its legal form.