Accounting and Business Research

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The true and fair view and the ‘fair presentation’

override of IAS 1

Lisa Evans

To cite this article: Lisa Evans (2003) The true and fair view and the ‘fair presentation’ override of
IAS 1, Accounting and Business Research, 33:4, 311-325, DOI: 10.1080/00014788.2003.9729656

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Arcounlirig mid Besirreus Reueorrli. Vol. 33. No. 4. pp. 31 1-325. 2003 311

The true and fair view and the ‘fair

presentation’ override of IAS 1
Lisa Evans*
Abstract-This paper examines the ‘fair presentation’ requirement and the override in International Accounting
Standard 1. The paper’s objective is to attempt an explication of the nature, role and status of the override and to
make recommendations regarding its application. The author examines the wording of the relevant provisions in
IAS 1 and compares and contrasts these with other regulation containing similar concepts, such as the European
Union’s fourth directive, UK and German law and US regulation. The ensuing discussion is centred around three
interrelated themes: the hierarchies of (legal) rules in different legal systems, the relationship of ‘fair presentation’
to IASC/B pronouncements and the status of the override in IAS I . It is argued that the override is considerably
weaker than the true and fair view override in the EU’s fourth directive and the UK’s Companies Act, and that its
role is not likely to go beyond that of a legal residual clause. The paper finally provides some initial evidence that
the override is likely to be interpreted in this way in at least some countries, and recommends that a wider inter-
pretation should not be sanctioned by the International Accounting Standards Board, nor by those charged with the
enforcement of International Accounting Standards.

1. Introduction covers, inter alia, a further revision of IAS 1 (ED

The key objective of this paper is to attempt an ex- IAS 1). This includes more explicit guidance on
plication of the nature, role and status of the ‘fair the meaning of ‘present fairly’ than is offered by
presentation’ override in IAS 1, and to make rec- the extant version. Recent developments, most no-
ommendations regarding its application. tably the support for IASs by the International
According to its mission statement, the Organization of Securities Commissions (IOSCO)
International Accounting Standards Boards (IASB) and the European Union (EU), the restructuring of
‘is committed to developing, in the public interest, the IASB and recent agreements to work towards
a single set of high quality, understandable and en- convergence with the Financial Accounting
forceable global accounting standards that require Standards Board (FASB) of the US, suggest that
transparent and comparable information in general IASs are likely to play a greater role in interna-
purpose financial statements. ...’ (IASB website). tional accounting in the near future.
In 1997 International Accounting Standard 1 (re- In this paper the argument is developed that, for
vised), Presentation of Financial Statements was the IASB to meet its objectives, ‘present fairly’ has
issued by the (then) International Accounting to be more uniformly interpreted internationally
Standards Committee (IASC). The standard places than was the case for the related true and fair view
stronger emphasis on ‘fair presentation’ than was (TFV) principle of the EU’s fourth directive, and
previously the case in IASC pronouncements. It that abuses of the override must be prevented. It is
further proposed that the override in IAS 1 is of a
also contains an overriding provision for departure different nature than that in the directive, with a
from International Accounting Standards (IASs) much narrower application; that it is, in fact, a
where application of the standards’ requirements legal residual clause (see Walton, 1991) and as
would result in misleading financial statements. such closer to the role that ‘present fairly in con-
The Exposure Draft Proposed Improvements to formity with generally accepted accounting princi-
International Accounting Standards (May 2002) ples (GAAP)’ plays in US regulation, or even to
the German implementation of TFV. In support of
*The author is senior lecturer in accounting at the this proposition, the paper reviews evidence com-
University of Edinburgh. She is grateful to David Alexander, paring and contrasting the wording of the relevant
Simon Archer, Thomas Borchmann, David Cairns, Brigitte provisions in IAS 1 with related concepts, namely:
Eierle, Axel Haller, Falconer Mitchell, Christopher Nobes, Sir
David Tweedie, Peter Walton, three referees and the editor for with the TFV concept and override in the fourth di-
helpful suggestions and advice; however, any errors or misun- rective, in UK law and accounting standards and
derstandings, as well as the opinions expressed, are hers alone. in German company law, as well as with ‘present
Correspondence should be addressed to Mrs Evans at the fairly’ in US regulation. It also examines recent
Department of Accounting and Business Method, School of
Management, University of Edinburgh, William Robertson
German language literature. The discussion draws
Building, 50 George Square, Edinburgh, EH8 9JY, UK. on a framework suggested by Alexander (1999)
The final version of this paper was accepted in June 2003. and employs similar terminology, but reaches dif-
312 ACCOUNTING AND BUSINESS RESEARCH

ferent conclusions. It is organised around three and Presentation of Financial Statements (IASC
interrelated themes: ( i ) a re-examination of differ- Fra~?zerr.orA-) and in International Standard on
ences in the hierarchies of (legal) rules and their Auditing (ISA) 700). It is the context (for example
interpretation in different legal systems, and an at- explicit or implicit reference to a framework of
tempt to determine whether an overriding clause rules, such as GAAP, or their status in regulation),
such as ‘present fairly’ in IAS 1 is compatible with rather than the chosen label, which gives rise to the
Roman law legal systems; (ii) an investigation into differences in interpretation discussed in detail in
whether ‘present fairly’ in IAS 1 is a concept inde- Section 4. For this reason, much of the discussion
pendent of IASC/IASB pronouncements, or of the TFV literature is relevant also for the dis-
whether its meaning must be explicated with refer- cussion of ‘present fairly’, which forms the main
ence to this system of rules; (iii) an examination of focus of this paper.
the nature of the override in IAS 1 and in particu- For a discussion of the historical development of
lar of whether this is based on an independent fun- TFV and its predecessors, see for example
damental concept or is merely a (legal) residual Chastney (1975) or Walton (1991). When TFV
clause, equivalent in its effect to a functional or was introduced into UK legislation in 1947 no ex-
teleological interpretation of the law. The paper planation was offered by the legislators on why
concludes that the latter is the case, and that the this clause was preferred to its predecessor, ‘true
override is considerably weaker than the TFV and correct’ (but see de Paula, 1948; Chastney,
override in the fourth directive and the UK 1975; Rutherford, 1985; and Walton, 1991 for dif-
Companies Act. Finally, the paper provides evi- ferent suggestions). TFV has never been officially
dence that the override in IAS l is likely to be in- defined, and it has been argued that a definition
terpreted in this limited way in at least some would neither be possible nor desirable, as the
countries and recommends that a wider interpreta- principle is dynamic. While there had previously
tion should not be sanctioned by the IASB, nor by been little interest in TFV, the high inflation peri-
those charged with the enforcement of IASs. od of the 1970s gave rise to a discussion of the ap-
The remainder of this paper is structured as fol- parent conflict between TFV and historical cost
lows: Section 2 provides a review of TFV and ’fair accounting and the question of whether TFV
presentation’ literature. Section 3 examines the hi- should be attributed its ordinary, literal, or rather a
erarchy of rules in different jurisdictions. Section 4 ‘technical’ meaning (see e.g. Chastney, 1975;
provides an overview of the content and history of Flint, 1979; etc.). The consensus appears to have
IAS 1. It then examines the nature and role of been that TFV had indeed taken on a technical
‘present fairly’ and the override, proposes the nar- meaning which could not be derived from the nat-
row interpretation referred to above and provides ural meanings of the words ‘true’ and ‘fair’, or not
initial evidence in support of this proposition. from these alone. For example Hoffman and Arden
Section 5 provides a summary and makes some (1983:155) refer to TFV as ‘an abstraction or
policy recommendations. philosophical concept expressed in simple
English’ and give as another example of such un-
2. Background and review of earlier defined concepts the term ‘reasonable care’.
literature Further, the question of whether ‘true and fair’ rep-
This section provides an overview of the TFV/‘fair resent two separate, or one single concept, was ex-
presentation’ literature and an introduction to the amined, inter alia, by Rutherford (1989), Nobes
themes to be developed further in Sections 3 and 4. and Parker (199 1) and Parker and Nobes (1 99 1).
For reasons of space, it has to be selective, and fo- Another reason for the interest in TFV in the ac-
cuses on English language literature regarding ademic and professional literature from the 1970s
TFV in the UK and the EU (especially Germany’) onwards was its introduction into the fourth EU
and ‘present fairly’ in the US. Where pertinent to company law directive. It was introduced into the
the discussion, brief reference will also be made to second draft of this directive in 1974 after the UK,
English language literature in other countries. Ireland and Denmark had joined the EC, and was
Section 4 of the paper also draws on relevant felt by some to be a political tool intended to tem-
German language literature. per the continental, in particular German, influ-
TFV and ‘fair presentation’ are related concepts. ence on European accounting rules (see for
The terms are sometimes treated as equivalent (in, example Hopwood, 1990: 84-5). It was a new con-
inter alia, the IASC’s Framework f o r Preparation cept for all member states except for the UK,
Ireland and the Netherlands (which had previously
had a similar concept). The detailed development
I Germany is chosen because, with the non-implementation of the TFV provisions through the drafts of the
of the fourth directive’s TFV override, it presents one of the fourth directive was discussed inter alia by Nobes
most extreme positions in Europe, which is dichotomously op-
posed to the original UK position with its support for the over- (1983 and 1993) and Walton (1991 and 1997). The
ride. introduction of TFV into the directive gave rise tc
Vol. 33. No. 4.2003 313

examinations of its translations into the official shareholders and accountants do not share the
languages of the EU (Rutherford, 1983; Nobes, same connotative meaning for TFV. Nobes and
1993) and of its national implementations (Nobes, Parker (1991) carried out a survey of UK direc-
1993; Alexander, 1993; Ordelheide, 1993; etc.). tors’ interpretation of TFV and the relevance this
In the attempts to explicate the meaning of TFV concept has for them in practice; this was followed
its relationship to generally accepted accounting up by Parker and Nobes’s ( 1 991) study of UK au-
principles (or practices) and to accounting standards ditors’ views. Higson and Blake (1993) also inter-
has frequently been discussed. A useful review of viewed UK auditors, finding that their study gave
relevant literature was provided by Walton (1991). less support to the practical significance of TFV
Walton identified three different themes: TFV as a than the Parker and Nobes study.
legal residual clause, as an independent concept In non-empirical papers, Cook (1997) and Stacy
and as a code-word for generally accepted account- (1997) argue that TFV is useful to UK standard
ing principles (Walton, 1991: 9). A legal residual setters, Stacy however feels that TFV and in par-
clause is a safety net often included in legal docu- ticular the override are losing their significance for
ments such as contracts. It is intended to cover the the preparation of individual company accounts.
intention behind, or the spirit of, the document and While this also seems to be supported by the legal
to guard against unforeseen circumstances, and ex- opinion on TFV obtained by the UK’s Accounting
pected to be invoked only rarely. In the context of Standards Board (ASB) (Arden, 1993), and while
TFV, it would require provision of additional dis- a number of surveys by the FCderation des Experts
closures or departure from rules in order to avoid Comptables EuropCens (e.g. FEE, 1992 or 1994)
deliberate use of rules to present misleading figures. further suggest that, within the EU, the practical
The independent concept is independent of ac- significance of the TFV override is small,
counting regulation. It is a higher objective or ideal Alexander (1999 and elsewhere) argues for the
towards which accounting is evolving. It should continuing practical and theoretical significance of
guide standard setting or decisions in specific cases. TFV and the override. However, in Australia,
The third theme refers to an interpretation that ef- where a TFV override had previously existed and
fectively sees TFV as standing for generally ac- had been applied in practice, this was removed by
cepted accounting principles. In this interpretation, the government in the 1991 Corporations Act. It
GAAP represents accounting rules developed in an appears that the override had been invoked oppor-
ad hoc fashion as reaction to problems, but tunistically by company directors not wishing to
comply with certain accounting standards and be-
‘. ..does not represent a coherent, rationally con- lieving that it would be difficult to prove that de-
sistent set of principles ... . The accounting rules parture was not motivated by the TFV requirement
define the true and fair signified rather than the (Dunk and Kilgore, 2000: 214). A consequence of
signified having any independent existence or the removal of the override was increased disclo-
being used as a guiding principle by the light of sure, with some companies publishing two sets of
which rules are developed.’ accounts - one following accounting standards
(Walton, 1991: 9) and one departing from these, ostensibly in order
According to Walton, for most writers TFV has to show a TFV (ibid: 215).
aspects of more than one of the above definitions. In the UK, interest in the subject appears undi-
A concept related to TFV is the US ‘present fair- minished (see e.g. Alexander and Archer, 2002)
ly in conformity with GAAP’. It has been com- and recent developments continue to provide ma-
pared and contrasted with TFV by, inter alia, Zeff terial for academic debate. For example, the acces-
(1990/1994) and Alexander and Archer (2000). sion in 1995 of further countries to the EU
According to these authors, in spite of the similar provided material for the examination of TFV in
wording TFV and the US clause do not mean the yet more different settings (see Aisbitt and Nobes,
same thing and must not be confused (see also 2001 and Eberhartinger, 2001). Further, with the
Alexander, 1999), mainly because of their differ- publication of Financial Reporting Standard (FRS)
ent roles within their respective regulatory frame- 18 in December 2000, TFV has, more clearly than
works and because of the reference to GAAP in the was the case previously, become an explicit re-
latter. This will be discussed in more detail in quirement of UK accounting standards. Finally,
the introduction of the ‘fair presentation’ override
Section 4.3.3. McEnroe and Martens (1998) at-
in IAS 1 has given rise to discussion (see e.g.
tempted to test empirically the perceptions of in-
Alexander, 1999; Dunk and Kilgore, 2000), as un-
vestors regarding TFV versus ‘present fairly in
doubtedly will the current revision of IAS 1. These
conformity with GAAP’ . Their findings suggest
that investors do distinguish between the concepts
and prefer TFV.2 Empirical studies attempting to However, due to a number of questions regarding the re-
capture the meaning of TFV include Houghton search design, these findings should be interpreted with cau-
(1987, using Australian evidence), who argued that tion.
314 ACCOUNTING AND BUSINESS RESEARCH

issues form the main focus of the present paper. open to abuse, especially in the absence of an en-
Alexander (1999) introduces a useful, if contro- forcement body. Nevertheless, he suggests that a
versial, framework for the discussion of TFV/ Type A rule would be useful to preparers and au-
‘present fairly’ and their relationship to other types ditors in that it would help them interpret and
of rules. He examines the question of suitable choose between different Type C rules, to choose a
benchmarks against which the adequacy of finan- suitable accounting treatment where there are no
cial statements can be measured. He suggests three Type C rules and to force them to assess the need
different levels of rules: for additional disclosures. However, as an overrid-
ing criterion, Type A rules should only be available
Type A. A generally expressed all-pervasive fun- to standard setters (who need legal backing) in
damental concept. cases where standards have to be developed that
Type B. A set of rules, conventions or ways of conflict with (outdated) legislation. Alexander’s
thinking which are to be consistently applied to (2001) response to Nobes challenges Nobes’s ar-
situations both familiar and unfamiliar. guments, in particular with regard to the (non-) de-
Type C. The detailed provision of specific meth- sirability of an override for preparers.
ods for the treatment of all expected problems The evolution of the standard-setting process in
and situations. the UK reflects a gradual move from inductively
(Alexander, 1999: 240) derived GAAP to increasingly deductively derived
According to Alexander, an example of a Type A promulgated GAAP, in the shape of standards set
benchmark would be the TFV requirement in the by a standard setting body no longer controlled by
UK. Other examples could be ‘substance over accountants. Alexander ( 1999) argues that such
form’ or the ‘fair presentation’ override in IAS 1. standards (Type C rules) cannot form the basis of
An example of Type B would be a conceptual an explication of the TFV. Instead, his interpreta-
framework, such as the IASC Framework, the UK tion of TFV as a Type A rule appears in line with
ASB’s Statement of Principles, or the accounting Walton’s theme of an independent concept (see
principles of the fourth directive (Article 3 1). Type above). However, he does not distinguish between
C relates to regulation through detailed rules (but two separate issues: (1) the meaning of a Type A
not necessarily legislation), attempting to cover all rule (or the TFV), and (2) how it is to be applied in
possible situations. Alexander points out that often practice, i.e. operationalised.3 His explication of a
two or all three of these levels are used within one Type A rule is not sufficient as a basis that would
jurisdiction, which gives rise to questions of prece- allow us to apply it as a benchmark for financial
dence. He examines the approaches taken in the statements. He suggests that a Type A rule is to be
UK, in EU law, in Australia, the US and by the derived as follows:
IASC. He dismisses reliance on Type B rules, be- ‘In the absence of detailed law, custom prevails,
cause all conceptual frameworks are internally in- and if detailed law fails to give an adequate
consistent, and argues that the question of overall picture ... then the detailed law must be
supremacy of Type A or Type C rules has to be de- ignored or, if necessary, overridden. What the
cided. Alexander suggests that: ‘adequate overall picture’ does mean is itself a
‘[Allthough the supremacy of the Type C speci- matter of custom and consensus agreement.’
fication may be feasible, at least in the short term, (Alexander, 1999: 241, emphasis added)
it is inadequate in a dynamic economy, as choice He expands on this further (ibid: 242):
or change in such regulation is inevitably without ‘Customary practice, whether regulated or arising
reference to a more broadly-based objective.’ from habit, is governed and influenced, but not de-
(Alexander, 1999: 252) termined in detail, by concepts of a more funda-
He thus argues for the supremacy of Type A mental nature.’ To rephrase, what Alexander
appears to be saying is that the meaning of a Type
rules and welcomes the introduction of the ‘fair
A rule, i.e. of the ‘adequate overall picture’ (or
presentation’ override in IAS I , which he consid-
TFV), is subject to custom and consensus agree-
ers to be consistent with his view. (It is argued
ment. Customary practice in turn is influenced by
below that it is not consistent.) Nobes (2000: 307),
‘concepts of a more fundamental nature’. What
in a comment on Alexander (1999), argues that
these concepts are is not further explained, which
Alexander’s analysis ‘would be improved by dis-
makes this reasoning circular: a fundamental con-
tinguishing between law and standards, between
cept is defined by custom and consensus, which in
choice by preparers and choicekhange by regula- turn are guided by fundamental concepts.
tors, and between national and international regu- However, we cannot operationalise a Type A rule
lation’. Nobes disagrees with Alexander on the
merits of a Type A override in accounting stan-
dards. He argues that it should not be available to I am grateful to Peter Walton and to David Alexander for
preparers of financial statements, as this would be pointing this out.
Vol. 33. No. 4. 2003 315

such as TFV without some understanding of how erali, i.e. a specific law takes precedence over a
it is represented in practice, and we cannot possi- more general law, which creates an inherent con-
bly have such an understanding without initiation flict with the idea of an overriding Type A rule.
and socialisation in a particular accounting subcul- This is one of the reasons for the non-implementa-
ture. This in turn will rely on evolving rules tion of the fourth directive’s TFV override in
(whether written or unwritten) and custom. This Germany. However, the situation is by no means
means that TFV is not an independent concept. clear-cut. Budde (1988: 43) states that the debate
regarding the hierarchy of rules is often based on a
3. The hierarchy of (legal) rules misunderstanding of the above rule of interpreta-
This section examines the problem of the hierar- tion. He suggests that it may only be applied after
chy of rules. Alexander (1999) writes from a the specific law/rule has been interpreted against
Common law perspective. His central question is the background of the general law/rule and that
that of the precedence between Type A, B and C ‘[olnly where the special rule itself allows no
rules. Legislation (if not accounting standards) is freedom of interpretation is it absolutely superi-
usually governed by rules of interpretation. The or. Where this is not the case - and that would
problem is that these rules and their hierarchy dif- probably apply to many accounting and valua-
fer between different legal systems, in particular tion provisions -the special rule must first be in-
between Roman law and Common law. The differ- terpreted by means of the general legal thoughts
ent approaches regarding interpretation owe much and rules of conduct.’
to differences in legal style, and in particular to the (Ibid., translation, emphasis original)
tightness of drafting of the different style^.^
Grossfeld (1989: 871) suggests that Common law Similarly, Leffson (1 979: 2 14, translation) notes:
interprets statutes more narrowly than Roman law ‘In principle a lex specialis takes precedence
and concludes: over a lex generalis. According to the science of
‘[Ilt may well be, that article 2, Section 4 and 5 legal interpretation, however, the general claim
of the Fourth Directive only relate to the English of the lex generalis always remains next to the
technique to construe a statute, whereas they do lex specialis which has been set as exception to
not add much to the Continental mode of inter- the general clause or even to enable its realisa-
pretation. It may turn out that the English ‘true tion. Where lex specialis requires interpretation,
and fair view’ is just a means to bring English lex generalis becomes effective.’
techniques of interpretation in line with Although these quotations do not support the
Continental traditions, which in turn govern the override of a specific clause by a general one, there
interpretation of EEC rules.’ is an additional argument: Previous international
Alexander (1 999) revives a previous debate re- TFV literature seems to have taken little account
garding the precedence of Type A rules (such as of the fact that general clauses, far from being alien
TFV/‘present fairly’) over Type B rules (such as to Roman law, play an important part in these legal
the accounting principles stated in the fourth di- systems. For example David and Brierley (1985:
rective) (see Alexander, 1993 and 1996 and 120, emphasis added; see also pp. 1 5 0 4 ) state:
Ordelheide, 1993 and 1996): ‘Another method used to adapt the law to mod-
‘Ordelheide is arguing in the terminology of this ern conditions not anticipated by its draftsmen,
[Alexander’s] paper that a Type B approach is and without changing the meaning of the text,
superior to, and determines the meaning and im- involves applying general provisions of law in
plications of, a Type A approach. This of course order to neutralise more specific provisions.
is the exact opposite of UK tradition and of the German practice offers the best example to il-
explicitly over-riding nature of the (Type A) lustrate this technique.’
TFV concept.’
(Alexander, 1999: 245) According to David and Brierley, this method re-
sulted from the necessity to give courts the means
This relates to Ordelheide’s (1993) reference to to adapt the law during times of crisis and change.
the Roman law rule lex specialis derogat legi gen- Examples of such general clauses would be Gute
Sitren (good morals) and Treu und Glauben (in
While on the one hand it may be relevant to distinguish be-
good faith). This approach appears to be close to
tween legal rules and professional standards (see Nobes, 2000). that of a legal residual cluuse in Walton’s termi-
in an international context it is necessary to consider that rules nology (rather than to a Type A rule or override in
with similar contents may be articulated differently in differ- Alexander’s). This suggests that even German law
ent regulatory frameworks (i.e. as standards or legislation), contains the possibility of a general clause over-
and that there is not necessarily the same relationship between
the type of rule and its status, nor the same attitude to cornpli- riding a specific one where a (perhaps outdated)
ance. (I am grateful to Peter Walton for pointing this out.) specific rule could be applied against the spirit of
316 ACCOUNTING AND BUSINESS RESEARCH

the law, i.e. the law allows or even requires the use ‘The FRS sets out general principles relevant to
of an overriding lex generalis in the sense of a reporting the substance of all transactions. Other
legal residual clause. In fact, such a possibility ex- accounting standards, the Application Notes of
ists in all legal systems in the EU (Van Hulle, the FRS and companies legislation apply gener-
1993: 101). Additionally, German legal interpreta- al principles to particular transactions or events.
tion can make use of what is known as the func- It follows that where a transaction falls within
tional or teleological interpretation of the law. the scope of both the FRS and another account-
Ordelheide (1993: 87) argues that the functional ing standard or statute, whichever contains the
interpretation of the law places the law’s meaning more specific provisions should be applied.
and purpose above its ~ o r d i n g : ~ Nevertheless, the specific provisions of any
standard or statute should be applied to the sub-
‘Functions and purposes are effects of a law stance of the transaction and not merely to its
which are desired by the legislator. They are de- legal form and, for this purpose, the general
rived by interpretation from the existing law, principles set out in FRSS will be relevant.’
which is imbedded in the legal order, but, in turn,
they also have an effect on the law as a means of In summary, it is argued here that all legal sys-
interpretation. In exceptional cases, the function- tems, including Roman law based legal systems,
al interpretation may not be in line with the lit- contain mechanisms that permit or even require
eral sense of a specific rule.’ the interpretation of a law against its literal mean-
(Ordelheide, 1993: 87) ing, if the literal meaning is clearly in conflict with
the spirit and purpose of the law or the intention of
This leads Ordelheide to claim that the function- the legislator, or has become outdated. Such limit-
al interpretation of the law is equivalent to the ed ‘overrides’ take precedence over the normal
TFV override, which would have made the imple- rules of interpretation, which, in Roman law sys-
mentation of the override requirement of the fourth tems, place specific laws/rules above general
directive redundant. Van Hulle (1997: 715) agrees laws/rules. These mechanisms are equivalent to
that Roman law countries have traditionally made the legal residual clause interpretation of TFV.
use of general concepts which may require depar- Their application however is so restricted that Van
ture from strict literal interpretations of the law ‘in Hulle (1997) argues that TFV in the Fourth
order to achieve the higher objective’, and that this Directive has to mean more than this. An addition-
also applies to the fourth directive, in that a literal al twist to the discussion is provided by the pas-
application of its provisions would be ‘inappropri- sage quoted from FRSS: Although normally, in
ate’.6 However, he disagrees with Ordelheide by Common law legal systems such as that of the UK,
arguing that the TFV in the Fourth Directive is general rules take precedence over specific rules,
more than a functional interpretation of the law the increasingly more detailed framework of stan-
and has a broader meaning. dards created by the ASB requires a different ap-
A further interesting angle to this problem be- plication in practice. It appears that, de facto, the
comes apparent on examination of recent trends in differences in the interpretation of the hierarchy of
UK accounting standards. While the TFV is still accounting rules in the UK and continental Europe
considered overriding, it cannot unambiguously be are decreasing, although it is unclear from the lit-
stated that general rules take precedence over more erature whether in Roman law countries, and espe-
specific ones. For example, FRSS (para. 42) states: cially in Germany, the means of ‘neutralising’
more specific laws through a functional interpreta-
tion or reference to general clauses are really open
’ Quoting: ‘The meaning and purpose of a law are more im- to preparers of financial statements, or have to be
portant than its wording’ (ibid.) (from a German supreme sanctioned by regulators or courts. Further discus-
court judgment). Ordelheide also gives the example of intra-
group profits, which had to be eliminated according to the sion, especially from the legal profession in conti-
prevailing interpretation of a German law (Aktiengesetz - nental Europe, would be helpful. The significance
Stock Corporation Law 1965) the literal meaning of which of the above issues for ‘fair presentation’ in IAS 1
would have prohibited elimination. will be examined in Section 4.
However, Haller (in conversation) considers departures
from the explicit wording of specific provisions in German
law hard to imagine. In his view, Ordelheide’s and Van Hulle’s 4. IAS 1
claim only applies if the wording permits alternative interpre-
tations. On the other hand, he suggests that certain foreign cur- 4.1. Content of IAS I
rency translation practices may depart, in the interest of the IAS 1 deals with the presentation of financial
TFV, from the strict interpretation of the codified prudence statements, i.e. inter alia the component parts of fi-
principle. However, there is nothing in the more specific rules nancial statements and the requirement for ‘fair
that explicitly prohibits these translation practices; thus it
could be argued that the TFV principle here merely serves the
presentation’. In the context of this paper, the
function of a filling of gaps in regulation. See also Baetge and most important sections of the extant standard
Commandeur (1995). are ‘Overall Considerations’ (IAS 1.10- 19) and
Vol. 33. No. 4. 2003 317

Table 1
Conditions of ‘fair presentation’

‘[Tlhe appropriate application of International Accounting Standards, with additional disclosure when neces-
sary’ (IAS 1.10);
‘[Slelecting and applying accounting policies in accordance with paragraph 20’ (IAS 1.15); This in turn re-
quires reference to existing IASs and SIC interpretations, or where there are no pronouncements, to qualitative
characteristics of the Framework, in particular relevance and reliability (see IAS 1.20);
‘[Plresenting information, including accounting policies, in a manner which provides relevant, reliable, com-
parable and understandable information’ (IAS I . 15);
‘[Plroviding additional disclosures where IAS requirements would be insufficient to reflect particular transac-
tions or events (IAS 1.15).

‘Accounting Policies’ (IAS 1.20-22). IAS 1.10 flows of an entity (that is, represent faithfully the
states that ‘[flinancial statements should present effects of transactions and other events in accor-
fairly the financial position, financial performance dance with the definitions and recognition crite-
and cash flows of an enterprise’. The IAS also at- ria for assets, liabilities, income and expenses set
tempts to curb the problem of partial compliance out in the Framework for the Preparation and
with IASs, e.g. by financial statements being de- Presentation of Financial Statements). The ap-
scribed as ‘based on’ IASs or similar (IAS 1.14). plication of International Financial Reporting
Thus it stresses that financial statements should Standard? and Interpretations of those
not claim to be complying with IASs unless they Standards, with additional disclosure when nec-
comply with each IAS and Standing essary, is presumed to result in financial state-
Interpretations Committee (SIC)’ interpretation ments that achieve a fair presentation.’
(IAS 1.1 1). IAS 1 acknowledges that, ‘in extreme-
ly rare circumstances’ application of specific re- Thus, the new draft contains a more explicit def-
quirements of an IAS may lead to misleading inition of ‘fair presentation’, which clearly refers
financial statements (IAS 1.16) and appears to de- to the Type B rules of the IASC Framework, as
mand departure from such requirements (IAS well as to the Type C rule Standards. ED IAS 1.12
1.13, 1.17 and 1.18). takes over much of the text of the extant IAS 1.15,
If management concludes that compliance with a while the extant IAS 1.20-22 have been moved to
particular standard’s requirement might be mis- ED IAS 8.9 ED IAS 1.13 requires an entity to de-
leading, the objective of the requirement has to be part from Standards or Interpretations where the
considered, and why it cannot be achieved or is not entity’s management concludes that compliance
relevant in the enterprise’s case (IAS 1.17). In ‘would be so misleading that it would conflict with
cases of departure, full disclosure, including dis- the objective of financial statements set out in the
closure of the financial impact of departure, is re- Framework’, however, only if the entity’s regula-
quired (IAS 1.13). In other words, a reconciliation tory framework requires or permits this. Where it
to the treatment under the standard has to be car- does not permit departure, extensive additional
ried out. It appears that application of the override disclosures are required instead. It is still stressed
is not really anticipated, as ‘[tlhe appropriate ap- that circumstances giving rise to departure would
plication of International Accounting Standards, be ‘extremely rare’ (ED IAS 1.13 and 1.15). Where
with additional disclosure where necessary, re- departure occurs, even more extensive disclosures
sults, in virtually all circumstances, in financial than in the extant version are required (ED IAS
statements that achieve a “fair presentation”’ (IAS 1.14).
1.10). IAS 1 further unambiguously requires ‘fair
presentation’ to be interpreted on the basis of ex- 4.2. History of ?air presentation ’ in IASs
isting standards and SIC interpretations. In Although the IASC Framework refers to TFV
essence, and according to IAS 1.10 and 1.15 ‘fair and ‘fair presentation’ (para. 46), the idea of an
presentation’ requires meeting the conditions out- overriding concept was at the time considered but
lined in Table 1 (see also Cairns, 1999: ch. 8). rejected (Cairns, 1999: ch. 8). The original IAS 1
Thus IAS 1 provides a definition or framework for
the interpretation of ‘present fairly’.
This is made even more explicit in ED IAS 1.
’ As a result of the IASB restructuring, the SIC has been re-
placed by the International Financial Reporting Interpretations
The ED states (ED IAS 1.10, emphasis added) Committee (IFRIC).
The standards issued by the new IASB.
‘Financial statements shall present fairly the fi- This includes guidance to be followed by management in
nancial position, financial performance and cash the absence of a standard.
318 ACCOUNTING AND BUSINESS RESEARCH

(Disclosure of Accounting Policies) was published and that it ‘might be used more commonly, based
in 1975, but was subsequently merged with IAS 5 on each country’s interpretation of ‘fairness’ to
(Information to be Disclosed in Financial apply IAS selectively’ (IASC, 1996: 4). The IASC
Statements) and IAS 13 (Presentation of Current Board felt, therefore, that the override would be
Assets and Current Liabilities) into one standard detrimental to the comparability of IAS financial
as part of the so-called presentation project statements (ibid.). Nevertheless, comments on the
(Cairns, 1999: ch. 8).ADraft Statement of Principles possibility of an override, and how this should be
(DSOP) (Presentation of Financial Statements) restricted, were specifically invited. In the com-
was published in 1995 and the Exposure Draft E53 ment letters, approximately half of the IASC
(Presentation of Financial Statements) in July member bodies and other accountancy bodies ex-
1996. The DSOP did not refer to ‘fair presentation’ pressed themselves in support (including British,
nor did the majority of the comment letters re- Irish, Danish and Swiss accountancy bodies), half
ceived in response.’ONevertheless, some commen- against the introduction of an override (including
tators did express themselves in favour of the French, German and Australian accountancy bod-
introduction of TFV/‘fair presentation’ into IAS 1 ies).” Views of accounting firms differed, but a
(for example, Van Hulle, writing on behalf of the majority of the comments made supported the
European Commission and the Raad voor de override. Interestingly, Deloitte Touche Tomatsu
Jaawerslaggeving [the Dutch accounting stan- International suggested that the IASC should adopt
dards setting body]). a similar approach to departure to that in the US,
‘Fair presentation’ became a requirement in E53. where departures are extremely rare, but permitted
However, unlike the IASC Framework, E53 uses by the professional ethics rules in very narrow cir-
only the words ‘present fairly’, with no reference cumstances (see Section 4.3.3). Not surprisingly,
to TFV. Roberts, Weetman and Gordon (2002: the majority of representations made by individual
169) suggest that this change in emphasis ‘could companies supported the override, irrespective of
be seen as indirect evidence of a stronger US in- their national background.
fluence’. Further, ‘fair presentation’ was not in- The override was introduced in April 1997. No
tended to have overriding status (ED 53.15). There reasons for this change were given. IAS 1 (re-
was concern that it would, in practice, be impossi- vised), with the override, was approved in July and
ble to restrict the override to extremely rare cases replaced the old IASs 1, 5 and 13 (Cairns, 1999:
ch. 8). Cairns points out that such a change would
normally have required a further exposure draft,
lo This may have been due to the fact that the questions
but that time pressure relating to the core stan-
raised by the IASC in the invitation to comment did not specif- dards project prohibited this. According to Van
ically refer to it. Hulle (1997), Australia, Canada and the US argued
It is interesting to note that some of those in support of the strongly against the override; Canada and the US
override argued for the need to depart from IAS in order to
comply with an enterprise’s legal, cultural and economic envi-
for fear of abuses, Australia on the basis of actual
ronment (Japanese Institute of Certified Public Accountants); experience with abuses of the TFV override (see
or that an override should only be permitted ‘under certain leg- above). Thus, ‘the maximum they [Canada and the
islative and customary practices in each jurisdiction’ US] were prepared to accept was to ask the
(Malaysian Institute of Accountants): or where there is a con- International Federation of Accountants to include
flict with local laws (Institute of Chartered Accountants of
Pakistan). A similar view was taken by the German industry some kind of override test in the International
representative Gesellschaft fur Finanzwirtschaft in der Standards on Auditing’ (Van Hulle, 1997: 718).
Unternehmensfuhrung e.V.. This appears to reflect exactly the However, the EU Commission apparently lobbied
IASC’s concerns. The final sentence in the extant IAS I . I4 at- strongly for the override in order to prevent a con-
tempts to prevent the use of the override in such cases.
Wagenhofer (2001) suggests that the introduction of the flict with the fourth and seventh directives.12Thus
override was also demanded strongly by the UK - see also ‘[alfter a heated debate at the Board meeting in
Tighe and Grey (1997). Note that on the old IASC board each Beijing, July 1997, IAS 1 was adopted with the
country member had two representatives, but only one vote. override’ (ibid.). The override was however con-
According to Chris Nobes (correspondence and conversation),
the views of the two UK representatives on the override were sidered unacceptable by the Securities and
initially divided, with Sir David Tweedie in favour and Nobes Exchange Commission (SEC) (Tighe and Grey,
against an override available to preparers of financial state- 1997: 18; Cairns, 1999: ch. 8). In May 2002, ED
ments. After some amendments, the UK’s vote finally sup- IAS 1 was published, containing explicit guidance
ported the override. The German vote did not. According to
Nobes, the introduction of IAS 1.13 (d), which requires dis-
on the meaning of ‘present fairly’, extended dis-
closure of the financial impact of the departure, led to his re- closure requirements and further restrictions on
luctant acceptance of the override and to a majority vote in the application of the override. l3This latest devel-
favour. The board made a decision on each issue in the draft opment is in line with the arguments presented
document on a majority basis, while 75% majority was neces-
sary for final acceptance of the whole standard.
here, however lacks a theoretical basis. This paper
l 3 The consultation period ended on September 16 2002. At the provides such a basis, also drawing on legal con-
time of writing the revised standard has not yet been adopted. siderations.
Vol. 33. No. 4. 2003 319

4.3. Proposition, evidence and discussion of TFV is to be derived or how it is to be opera-

Alexander (1999: 251) suggests that IAS 1 tionalised. Because the directive is EU law, the
‘recognises the necessary supremacy of the Type A final authority for its interpretation and that of its
‘fair presentation’ over-ride’ : ‘IAS 1 as currently national implementations lies with the European
extant clearly confirms that ‘not to be misleading’ Court of Justice (Van Hulle, 1993). However, due
is an over-riding criterion, above following IAS to different accounting and legal traditions and
requirements, i.e. its Type A criterion over-rides its economic environments, TFV and the override are
Type C rules’. Although others seem to support interpreted and applied differently in different
Alexander’s interpretation (see e.g. Van Hulle, countries (Nobes, 1993; Alexander, 1993; Van
1997: 718; Cairns, 1999: ch. 8; Nobes, 2000) it is Hulle, 1993; etc.).
argued here that ‘not to be misleading’ and the IAS
1 override are not a Type A criterion (whether this 4.3.2. UK regulation
is, in Alexander’s terminology, ‘a generally ex- The UK’s de jure position, based on the long
pressed all-pervasive fundamental concept’, or in tradition of TFV and the override, is still one of
Walton’s, a ‘highcr objective’ or independent con- general support. Companies Act 1985 Section 226
cept), but rather that their emphasis is on a (legal) requires directors to draw up financial statements
residual clause or general clause in the sense dis- which show a TFV and comply with the provisions
cussed in Section 3. The following proposition is of the Act’s Schedule 4. Where compliance with
therefore suggested: the Act’s provisions is insufficient to provide a
‘P: The override in IAS 1 is no more than a TFV, additional information must be given.
Finally, Section 226 (5) states that, ‘[ilf in special
(legal) residual clause, and as such closer to the
US interpretation of ‘present fairly’ and even the circumstances compliance with any of those provi-
German interpretation of TFV rather than to that sions is inconsistent with the requirement to give a
of the EU’s fourth directive.’ true and fair view, the directors shall depart from
that provision to the extent necessary to give a true
Some preliminary evidence for the above propo- and fair view’.14 The reasons for and effects of
sition can be obtained by comparing the override such departures have to be disclosed. The
in the extant IAS 1 with the fourth directive, the Companies Act’s differs from the directive’s word-
UK’s Companies Act 1985 and FRS 18, and the US ing in that it permits the override in ‘special cir-
and German (see footnote 1) approaches. cumstances’ rather than in ‘exceptional cases’.
This could arguably lead to a wider interpreta-
4.3. I . The fourth directive tion.I5 As with the directive, no guidance as to the
Article 2 of the fourth directive requires that a meaning of TFV is given in the Companies Act
company’s accounts ‘shall be drawn up clearly and and Rutherford (1985: 487) argues that ‘the crite-
in accordance with the provisions of the directive’ rion employed in overriding the codes must logi-
and that ‘they shall give a true and fair view’. cally exist outside and independently of them’.
Where following the provisions of the directive is While the UK’s continuing de jure support for
insufficient to provide a TFV, additional informa- TFV and the override was also evident in that both
tion must be provided, and finally ‘[wlhere in ex- feature in FRS 18, this standard’s approach differs
ceptional cases the application of a provision of from the Companies Act’s in a number of ways
this directive is incompatible with the obligation (see FRS18.14-18 and 18.30). It requires an entity
... [to give a TFV], that provision must be depart- to adopt accounting policies which enable its fi-
ed from in order to give a true and fair view . .. .’. nancial statements to show a TFV. The accounting
Ordelheide (1993) argues that the TFV principle of policies should be consistent with accounting stan-
the directive has to be derived based on the rules dards, Urgent Issues Task Force Abstracts and
of the directive, however this view is not general- companies legislation (i.e. Type C rules). Where in
ly accepted (see for example Arden, 1997). The di- ‘exceptional circumstances’ compliance with these
rective provides no guidance on how the meaning would conflict with the TFV requirement, they
‘should be departed from.. .’. unless a TFV can he
I.i The wording in UK law pre- and post fourth directive is achieved by means of additional disclosures.
different, which may suggest that its meaning has changed Where the override is invoked, FRS 18 requires
(Walton, 1991: 23-4; Ordelheide, 1993). The wording very extensive disclosures, including a reconcilia-
changed again somewhat when the Companies Act I985 was tion to the treatment in the relevant rule (as does
amended by the Companies Act 1989 (see for example
Alexander, 1993: footnote 1 ). IAS 1 - see above). It could also be argued that the
Is For example, the controversial fact that the UK’s ap- reference to ‘exceptional’ circumstances implies a
proach permits the use of the override in accounting standards narrower interpretation than that implied by the
where these require departure from company law, as inter alia ‘special’ circumstances referred to in the
with SSAP 19, was critically discussed by Alexander (1993),
Ordelheide (1993), Nobes (1993), and Van Hulle (l997), with- Companies Act. A choice between different ac-
out resolving the situation satisfactorily. counting policies has to focus on which of these
320 ACCOUNTING AND BUSINESS RESEARCH

would be most appropriate for providing a TFV, the ‘fair presentation’ requirement has become re-
but this must be judged by reference to character- dundant. However, a previous attempt to drop it
istics such as relevance, reliability, comparability from the audit report met with opposition,I6 and
and understandability, i.e. Type B rules. Thus auditing standards retain the possibility of depar-
FRS18 seems to reflect a development towards a ture in limited circumstances (Cairns, 1999: ch. 8;
more rule-bound accounting framework, including see also the reference to Deloitte Touche Tomatsu
a more comprehensive, detailed framework of ac- International in Section 4.2).
counting standards.
4.3.4. The German position
4.3.3. US regulation The German implementation (see
Although the US is a Common law country, it is Handelsgesetzbuch - German Commercial Code -
usually suggested that SEC listed enterprises can- $264) and interpretation of the fourth directive’s
not depart from GAAP. Further ‘fair presentation’ TFV requirement wefe probably the most extreme
neither plays a part in the FASB’s conceptual at the time (but see Aisbitt and Nobes, 2001, with
framework nor within US GAAP. US GAAP is to regard to Austria and Sweden). It has the following
a large extent promulgated and is now mainly de- features (see for example Alexander, 1993): (i) the
termined by FASB pronouncements. Unlike TFV TFV override was not implemented into national
in the UK, ‘present fairly’ has no legal significance law; normally compliance with the detailed rules is
and ‘[ilts meaning is directly dependent on ‘gener- expected to be sufficient for the provision of a
ally accepted accounting principles’, which is TFV, but if financial statements should neverthe-
defined by reference to a large a body of authori- less be judged not to show a TFV, additional dis-
tative literature’ (Zeff, 1990/1994: 132). However, closures are considered sufficient to rectify this;
‘present fairly in conformity with GAAP’ has (ii) these disclosures may only be made in the
formed part of the audit report since 1939, and notes to the accounts; and (iii) financial statements
thus to give an opinion on compliance with its con- must present a TFV in accordance with the princi-
tent forms part of the auditor’s responsibilities. It ples of orderly accounting (Grundsatze ord-
is usually argued that, in practice, auditors would nungsmussiger Buchfiihrung - GOB).
not sanction accounts in which the ‘fair presenta- The discussion regarding the significance of
tion’ requirement had been used to justify a depar- TFV in German accounting shows widely differ-
ture from promulgated GAAP (Zeff, 1990/1994; ing views, however, according to Busse von Colbe
Alexander and Archer, 2000). Nevertheless, (1984: 123) the following official quote from one
Statement on Auditing Standards (SAS) No. 69 of the drafts of the German law implementing the
provides guidance on the meaning of ‘present fair- fourth directive sums up the leading opinion at the
ly in conformity with generally accepted account- time:
ing principles’ and presents a hierarchy of GAAP,
as well as offering guidance on how to deal with, ‘In spite of the pretentious formulation it is sup-
for a specific accounting treatment, the absence of posed that for practice there will be no principal
promulgated GAAP (as does the extant IAS 1.22). changes. That is assumed primarily because the
The American Institute of Certified Public scope of the general clause will not be changed
Accountants’ (AICPA) Code of Professional compared to existing law (Section 149 AktG).
Conduct Rule 203 allows for the possibility that As to now, the content and scope of the annual
literal application of official accounting principles financial statements are derived primarily from
may ‘in unusual circumstances, result in mislead- the specific accounting rules. Therefore the gen-
ing financial statements’, in which case departure eral clause must be applied if doubts arise in the
from such a principle would be, in theory, permit- interpretation and application of singular regula-
ted, although only under very restrictive condi- tions or if gaps in the legal regulation are to be
tions. In practice, this override has never been used closed.’
(see Van Hulle, 1997: 718, quoting an unnamed There is at present little German language litera-
SEC representative). Thus it could be argued that ture on the interpretation of ‘present fairly’ or the
override in the extant IAS 1, which may suggest
l 6 In 1978 the Cohen Commission (Commission on that it is not considered to be of any re1e~ance.l~
Auditors’ Responsibilities) recommended that the ‘fair pres- Among the limited literature available, there
entation requirement’ should be dropped from the audit report seems to be a strong opinion that the ‘fair presen-
wording because it was perceived as vague and as leading to
misunderstandings, and in 1980 the US Auditing Standards tation’ requirement in IAS 1 is, if anything, less
Board took up the recommendation and issued an exposure strong/overriding than the TFV of the directive.
draft for a Statement of Auditing Standard which dropped For example, Wagenhofer (2001 : 93) observes that
‘fairly’; however, it withdrew this exposure draft when it met now IAS 1 is formally in conformity with the di-
with opposition in comment letters (see Zeff, 1990/1994;
McEnroe and Martens, 1998). rective, that however according to the directive the
” I am grateful to Brigitte Eierle for pointing this out. application of the override can be wider. Budde et
Vol. 33. No. 4. 2003 32 1

al. (1999: 772-3, translation) suggest that ‘[tlhis 4.3.5. Discussion

sanctioned ‘true and fair override’ is likely, how- A comparison of the override of IAS 1 with the
ever, to play only an insignificant role in practice TFV/‘present fairly’ provisions of the fourth direc-
and possibly only to be relevant for ‘new’ ac- tive and UK, German and US regulations provides
counting issues’; and PricewaterhouseCoopers some preliminary evidence in support of the
Deutsche Revision (1999: 67-8) state: ‘Within the proposition stated above. It has been argued else-
framework of IASs, ‘fair presentation’ does not where for the fourth directive and for the UK’s
have the status of an overriding principle, i.e. it is Companies Act that TFV is a criterion existing
in principle not possible to refrain from the appli- outside the respective frameworks of rules. The
cation of detailed rules’. A large number of authors above comparison suggests that in US regulation
do not consider ‘fair presentation’ to be a general (for ‘present fairly’), FRS 18 and German law, and
clause, or an overriding general clause (for exam- for IAS 1 this is not the case. All of these provide
ple KPMG Deutsche Treuhand-Gesellschaft, a definition or framework for the interpretation of
1999: 25; Fahrion and Winterhoff, 2002: 737; see TFV/‘present fairly’ by reference to Type B and/or
also Pellens, 2001: 441, with regard to the IASC Type C rules. This is explicitly stated in the word-
Framework). Most authors acknowledge the possi- ing of the German law (‘TFV in accordance with
bility of departure from standards, however refer to GOB’) and US regulation (‘present fairly in con-
formity with GAAP’).20 Similar wording is now
it as being permitted rather than required (Budde
also used in ED IAS 1.10 to explain the meaning
et al., 1999: 772-3; PricewaterhouseCoopers
of ‘present fairly’: ‘... represent faithfully ... in
Deutsche Revision, 1999: 67-8; Achleitner and
accordance with ...’. This could be seen as further
Behr, 2000: 88; Pellens, 2001:441). They further evidence of a US influence. But even the extant
stress that application of IASs, SIC interpretations IAS 1 requires ‘fair presentation’ to be interpreted
and the IASC Framework’s qualitative character- on the basis of existing IASB and SIC pronounce-
istics will result in ‘fair presentation’, often with- ments. Further both IAS 12’and US regulation re-
out qualifying this statement with reference to ‘in quire explicitly that absence of promulgated rules
virtually all circumstances’. The examples provid- has to be addressed by reference to existing rules,
ed demonstrate that in German languageI8 litera- thus also emphasising reliance on a framework of
ture at least, the ‘fair presentation’ override of the rules for the explication of ‘present fairly’.
extant IAS 1 is considered to be interpreted as no Finally, and most importantly, the override in
more than a (legal) residual clause, and is likely to IAS 1 differs from the overrides of the fourth di-
have little practical significance.ly rective and the UK Companies Act and even
FRS18, because the requirement to depart is far
less clearly or explicitly stated. It is worded much
l 8 The authors quoted below are not necessarily all German more weakly and interpreted as much weaker in
nationals, but also Austrian (Wagenhofer) and Swiss
(Achleitner and Behr). However, Achleitner and Behr’s text-
the German language literature examined. It ap-
book on IASs (2000) is published in Germany, and the pears to be more in line with US regulation and
Austrian transformation of the fourth directive’s TFV require- German law where an override is theoretically
ment is similar to the German one in that the override is not possible, but expected to be applied only extreme-
implemented (Aisbitt and Nobes, 2001 ; for a different, though ly rarely - and perhaps will not occur, de facto, at
rather controversial view, see Eberhartinger, 2001 ).
I 9 In some cases the interpretations given mirror the German
all. It is further likely that, inter alia because of the
implementation of the TFV of the fourth directive (e.g. PwC, risk of litigation and the mainly rule-oriented ap-
1999: 67-8). proach of the Financial Reporting Review Panel
?” Although care must be taken not to confuse the concepts
(see e.g. Hines et al., 2001), the override will lose
of GOB and (US) GAAP - see for example Hailer (1 998).
Extant IAS I .20-22 and ED IAS 8. what practical significance it still has for preparers
?? ‘Present fairly’ and TFV also play a part in the audit opin- of financial statements also in the UK, but will
ion according to ISA 700. The approach taken in ISA 700, probably remain useful for standard setters (see
which does not permit the use of an override, was apparently also Stacy, 1997; Cook, 1997). Thus it could be ar-
fought unsuccessfully by UK representatives on the
International Federation of Accountants (IFAC) (Stacy, 1997; gued that the UK’s positions is de facto now not
Cairns, 2000). The ISA treats TFV and ‘present fairly’ as very different from that in the US (see also Stacy,
equivalent, but requires that they are defined with respect to an 1997 and Nobes, 2000).22
accounting framework, for example IASs (Cairns, 1999: 202). As stated above, the TFV and override of the
Thus the standard audit opinion reads: ‘In our opinion, the fi-
nancial statements give a true and fair view [or ‘present fairly fourth directive are interpreted and applied differ-
in all material respects’] ... in accordance with [IASs or na- ently in different countries. However, it has been
tional standards] and comply with [statutes or law]’. If ‘pres- argued that such flexibility is detrimental to finan-
ent fairly’ in IAS 1 did nor rely on an accounting framework cial statement comparability (Dunk and Kilgore,
(as is argued by Cairns, 1999), then the auditors would have to 2000). Such flexibility would reduce the accept-
give an opinion on TFV/‘fair presentation’ and compliance
with IASs (ibid.). It is argued here, however, that ‘present fair- ability of IASsAFRSs striving for international
ly’ in IAS 1 does also rely on an accounting framework. credibility on international capital markets, where
322 ACCOUNTING AND BUSINESS RESEARCH

comparability and transparency have to be para- specific rules take precedence over more general
mount. However, while Nobes (2000) is concerned rules, an overriding clause such as ‘present fairly’
about the differences in interpretation which may in IAS 1 is compatible with Roman law as long as
result from a preparer override in IAS 1, the ‘override’ is no more than a (legal) residual
Alexander (2001) argues that such differences are clause, i.e. equivalent to a functional or teleologi-
inevitable and necessary if justice is to be done to cal interpretation of the rules. (b) A tendency to
differing local situations. He advocates ‘[aln over- place more specific rules above more general ones
ride principle [within IASs], coupled with a truly is also observable in UK accounting standards, in
effective monitoring system’ (Alexander, 200 1: spite of the UK’s common law legal tradition.
148). However, such a monitoring system does not (ii) ‘Fair presentation’ is not a suitable bench-
exist, nor, given the inability of the EU to deal with mark for the preparation of IAS financial state-
incomplete or ‘soft’ transformations of directives ments unless it is interpreted with reference to the
(see e.g. Ordelheide, 1990), would it seem realistic system of IASB and IFRIC pronouncements. It is
to expect its implementation in the near future. not independent of, nor exists outside this frame-
Further, UK experience with the Financial work of rules. We are told in the extant IAS 1 what
Reporting Review Panel has shown that such an ‘fair presentation’ comprises and this has now
enforcement or monitoring agency will find TFV been stressed even more clearly in the proposals
or ‘fair presentation’ in itself unenforceable but is made in ED IAS 1, i.e. ‘fair presentation’ has to be
likely to look for compliance with rules (see e.g. defined in accordance with Type B rules, while
Hines et al., 2001). This is even more likely to compliance with Type C rules is presumed to re-
happen on an international level, given the diffi- sult in ‘fair presentation’. It is similar in this re-
culties of interpreting ‘fairness’ in different nation- spect to the US ‘present fairly’ and to the
al contexts. IASs provide a more sophisticated, implementation of TFV in German law, as well as,
more detailed framework of rules with fewer op- to some extent, to FRS 18. It differs in this respect
tions than directives did. IASs further have the ad- from the UK Companies Act and the EU fourth di-
vantage that they can be adapted faster to changing rective. In essence, so-called Type A rules cannot
circumstances and that they benefit from the work be operationalised without reference to Type B or
of the IFRIC (the former SIC). Thus there appears Type C rules, and thus would be meaningless with-
to be less need for an override.23 out such reference. It has previously been claimed
that the TFV principle of the fourth directive or of
5. Summary and recommendations the UK’s Companies Act must exist outside these
This paper has examined the requirement for ‘fair frameworks (Arden, 1997; Rutherford, 1985).
presentation’ and the ‘fair presentation’ override in However, it could be argued that, only where there
IAS 1, with the aim to explicate the nature, role is an incomplete system of rules (with little detail
and status of the override and to make recommen- and many options) will non-promulgated GAAP
dations regarding its application. The arguments have to be considered. This is less the case in
presented in this paper centred around three inter- other, more developed frameworks, such as mod-
related themes, relating to the differences in the hi- ern UK accounting standards or I A S S . ~ If ~‘fair
erarchy of (legal) rules in different jurisdictions, presentation’ in IAS 1 was seen as existing outside
the relationship of ‘present fairly’ to IASC/B pro- the system of Type B and Type C rules, this would
nouncements, and the status of the override. Its lead to difficulties in an international context,
findings and conclusions on these are as follows: where philosophical notions of fairness not de-
(i) (a) While normally in Roman law legal systems rived from a specific framework of rules vary very
widely. This would be detrimental to international
23 There is, of course, an important difference in whether the
harmonisation of accounting and to the operation
override requires departure from the law or from accounting of capital markets.
standards. Standards, especially domestic standards, are less (iii) Based on the above arguments, and on an
likely to feel like an imposition by ‘foreign’ lawyers and civil examination of the wording in IAS 1 and a com-
servants than EU law may do (Nobes, 2000: 308) and are also
less likely to become outdated. However, see also footnote 4. parison with related concepts, this paper examined
24 The Enron debacle has led to the suggestion that this may the nature of the override in IAS 1 and concluded
have been partly caused by the ‘rule-book’ approach of US that it is, or should be, viewed in its narrowest
GAAP, i.e. reliance on detailed guidance without an overrid- possible interpretation, i.e. as a (legal) residual
ing consideration of fairness. However, such suggestions usu-
ally over-stress the differences between UK GAAP, US GAAP
clause, rather than as an independent ‘all-pervasive
and IASs (for a discussion see inter alia Singleton-Green, fundamental concept’ as claimed by Alexander for
2002). Further, if the problems in the Enron case were caused Type A rules. As a (legal) residual clause, it would
largely by a desire to deceive, it appears unlikely that the ex- provide a safeguard against blatantly ‘wrong’ ap-
istence of a TFV override (in the UK sense) would have pre- plications of the letter of a law/rule not appropriate
vented this. It is more likely that, as the Australian experience
has shown, the existence of such an override provides more, to its context; as such it would, in this author’s
rather than fewer, opportunities to deceive. view, not conflict with Roman law legal traditions,
Vol. 33. No. 4. 2003 323

nor with US regulation. This interpretation is like- Alexander, D. (1993). ‘A European true and fair view?’.
ly to be adopted also in some continental European European Accounting Review, 2 ( 1 ): 59-80.
countries, especially those (like Germany) that, Alexander, D. (1996). ‘Truer and fairer. Uninvited com-
ments on invited comments’. European Accounting
due to the existing legal traditions, found a wider Review, 5 (3): 483-93.
interpretation of an overriding general clause diffi- Alexander, D. (1999). ‘A benchmark for the adequacy of
cult or impossible to implement in the context of published financial statements’. Accounting and Business
the fourth directive. Evidence for such an interpre- Research, 29 (3): 239-253.
tation in Germany has been provided. It appears in Alexander, D. (2001). ‘The over-riding importance of
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1 narrow any application of the override further ‘Anglo-Saxon’ financial accounting’. International
and support the arguments made in this paper. It is Journal ofAccounting, 35 (4): 539-57.
strongly recommended, therefore, that a wider in- Alexander, D. and Archer, S. (2002). ‘On economic reality,
terpretation or application of the override in IAS 1, representational faithfulness and the ‘true and fair over-
than as a (legal) residual clause, should not be ride’. Draft paper.
American Institute of Certified Public Accountants/
sanctioned by the IASB, nor by those charged with Auditing Standards Board (1991). ‘Official Releases:
enforcement of IASsAFRSs. Statement on Auditing Standards No. 69: The meaning of
It is further recommended that the IASB should present fairly in conformity with generally accepted ac-
reconsider the distinction made in ED IAS counting principles in the independent auditor’s report’.
1.13-15, namely requiring under the specified rare In: Journal of Accountancy (1992), March: 108-1 1.
conditions the use of an override where the report- American Institute of Certified Public Accountants/
ing entity’s regulatory framework demands or per- Auditing Standards Board (2000). ‘Official Releases:
SAS 93 - Omnibus Statement on Auditing Standards -
mits this, but permitting disclosures as an 2000’. In: Journal ofAccountancy (2001), January: 116-8.
alternative where this is not the case.25 Either the Arden, M. (1993). ‘The true and fair requirement. Opinion’,
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cases where compliance with Type C rules fails to ing standards’, Appendix, 22-6, Central Milton Keynes:
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