What does fair presentation mean?
Financial statements are described as showing a ‘true and fair view’ when they are free from material misstatements and faithfully represent the financial performance and position of an entity.
In some countries, this is an essential part of financial reporting.
Under International Financial Reporting Standards, financial statements are required to present fairly the financial position, financial performance and cash flows of the entity.
This issue is not dealt with directly by the Framework.
However, if an entity complies with International Financial Reporting Standards, and if its financial information is both relevant and faithfully represented, then the financial statements ‘should convey what is generally understood as a true and fair view of such information’.
Under IAS 1, ‘Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the IASB Framework.
What does faithful representation mean?
Faithful representation means more than that the amounts in the financial statements should be materially correct.
The information should present clearly the transactions and other events that it is intended to represent.
Also, the financial information must account for transactions and other events in a way that reflects their true substance and economic reality, their commercial impact, rather than their strict legal form.
If there is a difference between substance and legal form, the financial information should represent the economic substance.
An example of this is when a company enters into a finance lease, the substance of the transaction requires the entity to record an asset in its financial statements and a corresponding liability for the lease payments due.
Faithful representation also requires the presentation of financial information in a way that is not misleading to users, and that important information is not concealed or obscured as this may be misleading.
Fair presentation and compliance with IFRSs
“Fair presentation” is presumed when the International Financial Reporting Standards are applied with necessary disclosures.
Under IAS 1:
- When the financial statements of an entity fully comply with International Financial Reporting Standards, this should be disclosed.
- Financial statements should not be described as compliant with IFRSs unless they comply with all of the International Financial Reporting Standards.
So IAS 1 assumes financial statements are presented fairly when they comply with accounting standards.
However, it is important to remember the spirit and nature of the accounting standard, and not its strict definition when preparing financial statements.
This is especially true for complex transactions which may not be covered by an accounting standard.
In these cases, the substance of the transaction should take precedence over the strict legal form of the transaction.
Under IAS 1, fair presentation also requires an entity:
- to select and apply accounting policies in accordance with IAS 8 Accounting policies, changes in accounting estimates and errors. IAS 8 sets out guidance for management on how to account for a transaction if no accounting standard is applicable
- to present information in a manner that provides relevant, reliable, comparable and understandable information
- to provide additional disclosures where these are necessary to enable users to understand the financial position and performance of the entity, even where additional disclosure is not required by the accounting standards.