IASB framework provides conceptual guidance regarding preparation and presentation of financial statements whereas IAS 1 sets out the principles and rules for preparation and presentation of financial statements. So the difference between these two documents must be clear as framework does not amount to standard and is separate from International Accounting Standards. The provisions stated under framework as opposed to the standards are not instructions based because standards provide clear cut rules that must be followed. Also when framework and standards are in conflict over any matter then standards prevail. But there is one exception to this rule which will be discussed later.
Faithful representation is one of the qualitative characteristics of financial information that enhances reliability. Faithful representation is achieved by presenting the transactions and events in the way they are reasonably expected to be reported in the financial statements. For example, only the effects of those transactions should be reported that meets the recognition criteria of the elements of the financial statements. Also, to represent the transactions and events faithfully in the financial statements, the effects of transactions and events are reported on the basis of economic substance of the transactions instead of legal form of the transaction. For example, company had sold the asset but is still responsible for maintaining it or other risks then if this transaction is reported as sales instead of secured loan will not faithfully represent the transaction and thus will distort the effect of the transaction and may have the potential to influence users decisions.
Fair presentation means financial statements portrays the entity and its operations in true and fair view i.e. financial statements must be in line with the ground reality or in other words the financial position and financial performance of the entity according to the financial statements should be the same as the position and performance is in reality. According to IASB framework fair presentation is expected to achieve fair presentation by:
- the application of qualitative characteristics as discussed under framework; and
- the application of appropriate accounting standards
Simply put, fair presentation is the end result that is expected to be achieved by maintaining principle qualitative characteristics and the application of accounting standards.
IAS 1 Presentation of Financial Statements
According to IAS 1 fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions, recognition criteria and substance of transactions. Simply put, IAS 1 almost equates the fair presentation with the compliance with accounting standards which is presumed to result in the fair presentation of financial statements.
Para 17 – IAS 1
In virtually all circumstances, an entity achieves a fair presentation by compliance with applicable IFRSs. A 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 a hierarchy of authoritative guidance that management considers in the absence of an IFRS that specifically applies to an item.
- to present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information.
- to provide additional disclosures when compliance with the specific equirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.
Compliance with standards
As stated earlier the general rule is that if there is a conflict on any matter between the framework and the standard then standards prevail i.e. compliance with both framework and standards is necessary but when they are in conflict then standards will be complied and for the same reason IAS 1 almost equates the fair presentation with compliance as standards are made in a way that ensure true and fair financial statements.
However, under extremely rare circumstances management may conclude that compliance with the certain provisions of standards will be so misleading that it would conflict with the objectives of financial statements as stated in the IASB Framework. Under such circumstances management may depart from the provisions of the standard. This is known as true and fair override. In short, in extremely rare circumstances framework can prevail over standards.
Therefore, fair presentation is NOT just compliance with the standards but as standards are detailed so in virtually every circumstances compliance is presumed to achieve fair presentation. But its up to management to ensure that financial statements achieve true and fair view by achieving the objectives of the financial statements as laid down under IASB Framework.