“From the accountants’ perspective, what does ‘true and fair’ mean? In your opinion, is the true and fair requirements useful, or necessary?”
Accounting is the measurement procedure and communication of financial information (Needles and Powers 2013) that allows companies to report on the economic performance of their business. It is these reports which bring the concept of ‘true and fair’ into play. True and fair is a central concept related with the use of Financial Reporting Standards and the conceptual framework in keeping financial reports standardized and reliable for the users, namely shareholders and investors (Waqas 2013). Fair value accounting as viewed by a large percentage of specialists and academics has been considered a ‘revolutionary approach’ to support shareholders throughout the decision making process as it represents the current market value of an economic asset or liability (Kaya 2013). Although some have applauded the power of true and fair value, contenders have highlighted the substantial absence of consistency, thus valuing historical cost as a complete structure built of solid foundations.
‘True’ relates to the reliability and the consistency of information enclosed within financial reports. The truthfulness indicates that all the figures and numbers quoted are precise or close to being accurate based upon the financial reporter’s understanding of the situation (Miller & Bahnson 2007). Numbers are generally rounded to make the reporting of the financial positions uncomplicated, yet these numbers must be by and largely spot-on. They do not solely include cash transactions but also the value of assets (REFERNCE).
According to the International Financial Reporting Standard (IFRS) 13 ‘fair value’ is defined as being the worth that would be received for the sale of an asset or a price paid to handover a liability in an organized transaction between two parties at the procurement date in an active market [IFRS 13:1] (Deloitte, 2014). Fair value is therefore a market-based measure which is unaffected by factors specific to an individual entity. Hence it signifies a neutral measurement that is constant across time periods and corporate bodies (Penman 2007, p.33).
True and fair is determined via the requirements set out within the fair value hierarchy and guidelines set out by IFRS 13. The hierarchy is the central component of statement no.157 Generally Accepted Accounting Principles (GAAP). The hierarchy is comprised of three levels; level one, two and three respectively, where the order of preference must be adhered to by management when estimating the fair value of an asset or a liability (Miller & Bahnson 2007, p.30). The Objective of the measurement is to provide a current market price for assets and liabilities.
Level one input is that an asset can be valued in active markets for an identical asset or liability that the company can retrieve at the procurement date [IRRS 13:76]. A market value in an active market...