I am revisiting and expanding on an earlier blog posted here in December 2013 on "What is meant by 'true and fair view'?"
In that blog I explained that as the Department for Business, Innovation and Skills (BIS) had stated that correctly prepared micro-entity accounts would show a true and fair view, and as a result a smallish company with an investment property on its balance sheet could prepare accounts using either:
- the Micro-Entity rules
- or the FRSSE
- or FRS 102
and each of these accounts, if properly prepared, would show a true and fair view, only they would probably be quite different true and fair views!
Since then I have heard about a property company which held significant valuable properties for very many years, where the historic cost was low (below the micro threshold), where only a few people were employed, and this company had chosen the micro-entity option, including valuing the properties on the balance sheet at written down historic cost as revaluations are prohibited under this option! (See Mercia's FREE download, Changes in financial reporting: Micro-entities Q&A and sample accounts for full details.)
How could this be?
More recently in the Financial Reporting Council (FRC) Consultation Document on Accounting Standards for Small Entities (September 2014), the FRC say they are concerned that:
'A greater burden will be placed on directors to determine and provide specific additional disclosures over and above those required by the EU Accounting Directive/Revised CA in order to provide a true and fair view.'
I agree that small company notes limited to no more than the prescribed 13 notes may not show a true and fair view, but only in the context of what has traditionally been thought of as the challenging and rather subjective concept of a true and fair view!
It's probably worth referring to the latest FRC True and Fair statement published in June 2014 which says:
'Whilst there has been a gradual shift over time to more detailed accounting standards, the preparation of financial statements cannot be reduced to a mechanistic following of the relevant accounting standards. Objective professional judgement must be applied to ensure that financial statements give a true and fair view'. Hear hear!!
If you add into the mix the seriously large potential number of options available on the adoption of FRS 102 (PPE, Intangibles, Lease Incentives etc.), the scope for and number of different 'true and fair views' seems to become nearly infinite?
And yet in the owner managed sector what do users really need?
In a recent blog published by the periodical 'Financial Director', Peter Hollis Chairman of the ICAEW Practice Committee and ex officio member of ICAEW Council pointed out that the FRC and its main committees very seriously under-represent the SME sector. He was quoted as saying:
The FRC's board, plus accounting and audit councils, are 'composed entirely of people that have listed company background or are retired civil servants. There is no representation from the SME sector."
We probably would agree that a possible result of this could be that FRC standards may not always seem to be appropriate to the SME sector?
There is no room in a short blog to present proposals for change but has the time come for a fundamental rethink of what the accounts of smaller owner managed entities should contain?
I hope that some of you reading this blog will make suggestions as to what might be better solutions, so please post your thoughts below.
The above is of course my own personal views rather than those of Mercia.