Fair Presentation in Business

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What is fair presentation?

Directors are required to issue financial statements that present fairly the financial position,

financial performance and cash flows of an entity. This means that the financial statements must be a faithful representation of the effects of transactions and other events in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in IFRS.

The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation.

A component of this involves the selection and application of accounting policies in accordance with IAS 8, Accounting Policies,

Changes in Accounting Estimates and Errors; Auditors are required to give an independent opinion on whether financial statements are presented fairly. If in the opinion of the auditor fair presentation is not achieved the auditor will issue a qualified audit report.

These requirements do not result in a statement of financial position that is correct in the sense that there is only one possible answer to different accounting questions. In reality, a fair presentation can encompass a range of different figures.

This is due to the fact that:  alternative accounting policies can produce different results: and

 the application of accounting policies in accordance with IAS 8 is often based on estimates and judgements. Indeed valuation and estimation are key factors in drafting financial information

 

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IFRS has tried to reduce the impact of the above in a number of ways including:

 Removing choices of accounting policy – there are fewer areas of choice now than there were 10 years ago.

 Providing rules on the selection of accounting policies (IAS 8);

 Requiring disclosure of judgements, estimates and key sources of measurement uncertainty (IAS 1);

 Requiring disclosure of significant accounting policies (IAS 1);  Including firmer guidance on fair values (IFRS 13).

The IAS 1 disclosure requirements in respect of accounting policies do not ensure comparability but they do allow a user to understand the potential impact of any differences in approach.

 

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Management may use various forms of creative accounting to manipulate the view given by the financial statements while complying with all applicable accounting standards and regulations.

Creative accounting is not necessarily illegal but the practice might cross the line into fraudulent reporting. Creative accounting techniques include the following:

 Window dressing: an entity enters into a transaction just before the year end and reverses the transaction just after the year end. For example, goods are sold on the understanding that they will be returned immediately after the year end; this appears to improve profits and liquidity. The only reason for the transaction is to artificially improve the view given by the financial statements.

 ‘Off balance sheet’ finance: transactions are deliberately arranged so as to enable an entity to keep significant assets and particularly liabilities out of the statement of financial position (‘off balance sheet’).

This improves gearing and return on capital employed. Examples include sale and repurchase agreements and some forms of leasing.