a fair presentation meaning

Accounting Policies – Fair Presentation and Faithful Representation for IFRS

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.

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Fair Presentation

An accounting standards’ requirement that an entity’s financial statements should be presented in a fair way to all relevant users of these statements. In other words, it is premised on the requirement that these statements should not be misleading. Under the principle of fair presentation, financial statements must fairly present the financial position, financial performance and cash flows of the entity. Fair presentation requires the faithful (unbiased) representation of the monetary effects of transactions, other events and circumstances in accordance with the applicable concepts and recognition criteria for assets , liabilities , income and expenses .

Fair presentation is the US and International Accounting Standards (IAS) equivalent of the British requirement that financial statements provide a true and fair view (which entails that statements/ accounts have been truly prepared and fairly presented in accordance with applicable accounting standards and framework . It also implies that the financial statements are free from material misstatements and faithfully represent the financial position and performance of an entity, subject-matter of an audit process.).

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The requirement that financial statements should not be misleading. ‘Fair presentation’ is the US and International Accounting Standards equivalent of the British requirement that financial statements give a true and fair view.

From:   fair presentation   in  A Dictionary of Finance and Banking »

Subjects: Social sciences — Economics

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Fair presentation

IAS 1 says that the statements must present fairly the financial position, financial performance and cash flows of the entity. It specifies that it is presumed that this will be achieved by compliance with IFRS. However, it does allow that ‘in extremely rare circumstances’ an entity may decide that compliance would not result in a fair presentation, and in such circumstances it may depart from individual standards. If it does this, it must explain why and show the effect on the financial statements.

It adds a proviso that this is available to the extent that the relevant regulatory framework, normally national law, allows or does not prohibit such a departure. For example, the EU company law directives specify that if following GAAP does not give ‘a true and fair view’ an entity should in the first instance disclose extra information, and only if that is not thought workable, not follow the standard concerned. (The UK Accounting Standards Board obtained a legal opinion that producing statements that fairly present under IFRS is equivalent to providing a true and fair view.)

the statements must present fairly the financial position, financial performance and cash flows of the entity

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Fair presentation: Ensuring Fair Presentation: The Auditor's Report's Role

1. the importance of fair presentation in financial reporting, 2. understanding the auditors role in ensuring fair presentation, 3. the auditors responsibility for detecting fraud and error.

In the realm of financial reporting, ensuring fair presentation is not merely a regulatory requirement but a fundamental tenet that underpins the trust and integrity of financial information. The significance of fair presentation cannot be overstated, as it directly influences stakeholders' decision-making processes, from investors and creditors to management and government bodies. This section delves into the critical importance of fair presentation in financial reporting, shedding light on various perspectives and providing valuable insights on the role of the auditor's report in upholding this principle.

1. Transparency and Trust : Fair presentation is the cornerstone of transparency in financial reporting . It is the means by which organizations communicate their financial performance and position to the outside world. When financial information is transparent and presented fairly, stakeholders can trust that they are making informed decisions . Investors, for instance, rely on these reports to allocate their capital effectively, and creditors use them to assess the creditworthiness of an entity. A lack of transparency or a failure to present financial information fairly can erode trust, potentially leading to a loss of confidence and investment.

2. Comparability : Fair presentation ensures that financial statements are prepared using consistent accounting principles and policies. This consistency allows for meaningful comparisons, both within an organization over time and between different companies within the same industry. Imagine the chaos if companies were free to choose their own accounting rules without any standardization. For instance, if one company uses the straight-line method for depreciating its assets while another uses the declining balance method , comparing their financial performance becomes exceedingly difficult. Fair presentation, therefore, enables meaningful benchmarking and analysis.

3. legal and Regulatory compliance : Many legal and regulatory requirements necessitate fair presentation in financial reporting. Failure to comply with these standards can lead to legal consequences, financial penalties, or even criminal charges. For example, in the United States, the sarbanes-Oxley act enforces strict standards for fair presentation to prevent corporate fraud. In Europe, the international Financial Reporting standards (IFRS) are widely adopted to ensure consistency and fairness in financial reporting. These regulations serve as safeguards against accounting irregularities.

4. Credibility and Public Perception : Companies that consistently present their financial information fairly earn a reputation for credibility and reliability. Stakeholders are more likely to invest in or extend credit to organizations with a track record of transparent and fair financial reporting. Furthermore, a positive public perception can boost a company's stock price and enhance its ability to attract both customers and top talent. Fair presentation, thus, extends beyond the mere fulfillment of legal requirements; it plays a crucial role in shaping a company's image and market standing.

5. Risk Mitigation : Fair presentation helps organizations identify and manage financial risks effectively. By accurately representing their financial position, companies can proactively address issues, make informed decisions, and implement risk mitigation strategies . For instance, a company with fair presentation practices is more likely to detect early signs of financial distress, enabling it to take corrective actions to avoid bankruptcy or insolvency.

6. Auditor's Role : The auditor's report is an integral part of ensuring fair presentation in financial reporting. Auditors are responsible for examining an entity's financial statements , assessing whether they comply with accounting standards , and verifying that they provide a true and fair view of the financial position. Auditors' independence and objectivity are paramount to this process, as they play a critical role in maintaining the credibility and reliability of financial statements .

Fair presentation in financial reporting is not a mere formality but a fundamental principle that upholds transparency, trust, and reliability in the world of finance. From enabling meaningful comparisons to ensuring legal compliance and risk mitigation, fair presentation is a linchpin in the decision-making processes of stakeholders and the financial well-being of organizations. The auditor's report serves as a guardian of this principle, ensuring that financial information accurately reflects an entity's financial health and performance .

The Importance of Fair Presentation in Financial Reporting - Fair presentation: Ensuring Fair Presentation: The Auditor's Report's Role

Auditors play a pivotal role in ensuring fair presentation in financial reporting. Their responsibilities go beyond mere number crunching; they are guardians of financial transparency and integrity. The auditor's report, often regarded as the seal of approval on a company's financial statements, serves as a critical tool in building trust among stakeholders . In this section, we will delve into the auditor's role in ensuring fair presentation, exploring various facets of their responsibilities, challenges, and the impact they have on the financial landscape .

1. Independence and Objectivity: Auditors are expected to maintain independence and objectivity while scrutinizing a company's financial statements. Their impartiality is crucial in providing an unbiased assessment. This ensures that any potential conflicts of interest are minimized, and stakeholders can have confidence in the fairness of the financial presentation.

2. Compliance with Standards: Auditors must adhere to rigorous professional standards and guidelines. For instance, the International Standards on Auditing (ISA) or the Generally Accepted Auditing Standards (GAAS) in the United States provide a framework for conducting audits. These standards help auditors maintain consistency and quality in their work.

3. Materiality and Risk Assessment: Auditors need to consider materiality and assess risks when planning their audit procedures. Materiality refers to the threshold at which errors or omissions could impact the decisions of users of financial statements. Through a risk assessment, auditors identify areas where there is a higher likelihood of material misstatements, enabling them to focus their efforts where they are most needed.

4. Internal Controls Evaluation: Auditors often evaluate a company's internal controls, which are the policies and procedures in place to prevent and detect errors and fraud . Effective internal controls contribute to fair presentation by reducing the risk of misstatements. For example, if a company has robust controls in place for handling cash transactions, it's less likely that financial statements will misrepresent cash balances.

5. Substantive Procedures: Auditors perform substantive procedures to obtain evidence about the fairness of financial statements. These can include detailed testing of transactions, account balances, and analytical procedures. For instance, an auditor might perform a detailed review of a company's accounts receivable to confirm the accuracy of reported sales figures.

6. Sampling and Audit Evidence: Auditors often rely on sampling to gather audit evidence efficiently. They select a representative sample of transactions or items to test, rather than examining every single one. The key is to design samples that provide a reasonable basis for drawing conclusions. For example, in auditing inventory, an auditor may select a sample of items to physically count and compare against the recorded amounts.

7. Subsequent Events: Auditors also consider subsequent events that may affect the fairness of financial presentation. These events occur between the end of the reporting period and the issuance of the financial statements. For instance, if a company reports a profit at year-end, but a major lawsuit is filed against the company after year-end, the auditor must consider whether this event should be disclosed in the financial statements.

8. Going Concern Assumption: Auditors assess the entity's ability to continue as a going concern, which means it can meet its obligations for the foreseeable future. If there are concerns about the entity's ability to continue, auditors must consider how this affects the financial presentation and whether disclosures or modifications to the financial statements are necessary.

The auditor's role in ensuring fair presentation is multifaceted and vital to the integrity of financial reporting. Their independence, adherence to standards, risk assessment, evaluation of internal controls, and substantive procedures all contribute to the credibility of financial statements. Auditors are not just number-checkers; they are gatekeepers of financial transparency, serving the interests of stakeholders and the broader financial community.

Understanding the Auditors Role in Ensuring Fair Presentation - Fair presentation: Ensuring Fair Presentation: The Auditor's Report's Role

In the realm of financial reporting, one of the most critical aspects that auditors grapple with is their responsibility for detecting fraud and error. The auditor's role in ensuring a fair presentation of financial statements goes beyond merely confirming the mathematical accuracy of numbers. Detecting fraud and error is a multifaceted challenge, as it demands not only a deep understanding of financial systems and transactions but also a keen eye for anomalies and inconsistencies. This responsibility is essential because financial statements are the bedrock of decision-making for various stakeholders, including investors, creditors, regulators, and the general public. ensuring the accuracy and reliability of these statements is paramount in maintaining the trust and integrity of the financial markets. In this section, we will delve into the intricate dimensions of the auditor's responsibility for detecting fraud and error, considering different perspectives and providing insights into this critical aspect of their work.

1. Understanding the Auditor's Duty :

- Auditors are obligated to obtain reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. This duty is articulated in auditing standards, underscoring the importance of their role in preventing financial misrepresentation.

2. Differentiating Fraud from Error :

- Fraud and error are distinct but interrelated concepts in auditing. Error refers to unintentional mistakes in financial statements, while fraud involves intentional misstatements. An example of an error could be a typographical mistake in a balance, while fraud might entail purposefully inflating revenue to attract investors.

3. Auditor's Responsibility for Fraud Detection :

- Auditors are responsible for assessing the risk of fraud within an organization. This involves understanding the entity's internal controls, evaluating the presence of fraud risk factors, and conducting procedures specifically designed to detect fraud. For instance, an auditor may scrutinize revenue recognition practices to identify potential red flags.

4. The Challenge of Fraud Detection :

- Detecting fraud can be challenging because fraudsters often go to great lengths to conceal their activities. It requires auditors to adopt a skeptical mindset, think critically, and employ forensic audit techniques, such as data analytics and extensive transaction testing.

5. Whistleblower Tips and Internal Controls :

- Sometimes, tips from whistleblowers or employees can be a valuable source of information in identifying fraud. Additionally, effective internal controls within an organization can act as a deterrent against fraudulent activities and make it easier for auditors to detect discrepancies.

6. Professional Judgment and Materiality :

- Auditors exercise professional judgment in determining the materiality of misstatements. Materiality is a crucial concept in auditing, and auditors focus on significant misstatements that could impact the decision-making of financial statement users.

7. Auditor's Reporting Obligations :

- If auditors discover evidence of fraud, they have a responsibility to report it to the appropriate parties, including management, the board of directors, and regulatory authorities, as per their ethical and professional obligations.

8. legal and Ethical considerations :

- Auditors must navigate the legal and ethical dimensions of fraud detection carefully. Failing to detect fraud can lead to lawsuits and damage to an auditor's reputation, while making false accusations can also have serious consequences.

9. continuous Professional development :

- The field of auditing is continually evolving, and auditors must stay updated with the latest auditing standards, techniques, and technologies to better equip themselves in detecting fraud and error in an ever-changing business environment.

The auditor's responsibility for detecting fraud and error is a pivotal aspect of their role in ensuring a fair presentation of financial statements. It demands a combination of technical expertise, critical thinking, and ethical considerations to strike the right balance between thorough examination and professional judgment. In an era where financial transparency and integrity are paramount, auditors play a crucial role in upholding the credibility of financial reporting and safeguarding the interests of various stakeholders.

The Auditors Responsibility for Detecting Fraud and Error - Fair presentation: Ensuring Fair Presentation: The Auditor's Report's Role

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True and Fair presentation

Table of Contents

True and Fair presentation Definition

Financial statements are produced by the Board of directors which give a true and fair view of the entity’s results. The auditor in reviewing these financial statements gives an opinion on the truth and fairness of them. Although there is no definition in the International Standards on Auditing of true and fair it is generally considered the meaning of

True and Fair presentation as following

True  – Information is based on facts and conforms with reality in that there are no factual errors. In addition, it is assumed that to be true it must comply with accounting standards and any relevant legislation. True includes data that is correctly transferred from accounting records to the financial statements.

Fair  – Information is impartial, clear and unbiased, and representing the commercial substance of the transactions of the entity.

Board of directors = The person who is responsible for overviewing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overviewing the financial reporting process.

Management –  The persons with executive responsibility for the conduct of the companies operations. In some cases, all of those charged with governance are involved in managing the company, Example, a small business (sole trader) where a single owner manages the entity and no one else has a governance role

Engagement partner –  The partner in the firm who is responsible for the audit engagement and its performance (who is authorized to sign the audit report), and for the auditor’s report that is issued on behalf of the firm and who has the authority from a professional, legal or regulatory body.

Professional judgment –  The application of audit training, experience and knowledge, within the context provided by the client, accounting and principles of ethical standards, in making decisions on the base of information about the courses of action that are appropriate in the circumstances of the audit engagement.

Professional skepticism –  An attitude that includes a questioning mind, being alert to conditions which can indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence. Professional skepticism includes being alert to, for example:

• Audit evidence that conflicts with other audit evidence obtained by the auditor.

• The questionable information brings the reliability of documents and responses to inquiries to be used as audit evidence.

• Conditions that may indicate possible fraud.

• Circumstances that suggest the need for audit procedures required by the ISAs.

• Appointment Removal & Role Of An Auditor
• Fundamental principles of ethics

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What is the difference between a Fair presentation framework and a Compliance framework?

Financial statements are prepared to fulfill information needs of its users. In order to cater the needs at best a certain financial reporting framework is used considering the jurisdiction in which the entity and/or its users exist. For example two of the popular financial reporting framework are IFRSs and US GAAPs. However, talking about the nature of reporting frameworks, we can have to types of framework:

• Fair presentation framework (also known as conceptual framework)
• Compliance framework (also known as rule-based framework)

Fair presentation framework is such a framework that requires compliance with the provisions of framework but in addition that it acknowledges that:

• in achieving fair presentation management might have to make such additional disclosures that are not specifically required by the framework; and
• in extremely rare circumstances it might be necessary to depart from the requirements of the framework to achieve fair presentation of the entity’s financial position and performance in the financial statements

Compliance framework, as the name suggests, requires compliance with the provisions of the framework i.e. strict obedience of instructions is required and the ones preparing financial statements have no choice but to follow the requirements of framework. Compliance framework does not allow any room or flexibility as given under fair presentation framework.

In simple words, although fair presentation framework requires compliance but it still allows for the alternatives that can achieve better presentation of financial statements resulting in more relevant and reliable financial statements even if management has to make additions or go against the requirements of framework. Whereas, in compliance framework no such leverage is given and under this framework complete compliance is required under any condition.

While preparing financial statements those who are responsible to prepare financial statements needs to inform users regarding the financial reporting framework used and also in case of any departure, if fair presentation framework is used, disclosures shall be made with such prominence as required so that users can understand and also provide the reasons why departure was necessary and how the alternative treatment adopted by the management resulted in more relevant and reliable financial statements.

In audit engagements, auditor has to consider the framework used to prepare financial statements as it has bearing on the audit engagement down to the level of audit report.

it has not complied with what it needs to be complied. That is what happens

what happen if the entity complied with fair presentation framework but not comply with compliance framework?

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Financial statements (AASB101_07-15_COMPmar20_07-21)

Financial statements, purpose of financial statements.

Financial statements are a structured representation of the financial position and financial performance of an entity. The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the management’s stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about an entity’s:

(a)             assets;

(b)             liabilities;

(c)             equity;

(d)             income and expenses, including gains and losses;

(e)             contributions by and distributions to owners in their capacity as owners; and

(f)             cash flows.

This information, along with other information in the notes, assists users of financial statements in predicting the entity’s future cash flows and, in particular, their timing and certainty.

Complete set of financial statements

A complete set of financial statements comprises:

(a)             a statement of financial position as at the end of the period;

(b)             a statement of profit or loss and other comprehensive income for the period;

(c)             a statement of changes in equity for the period;

(d)             a statement of cash flows for the period;

(e)             notes, comprising significant accounting policies and other explanatory information;

(ea)             comparative information in respect of the preceding period as specified in paragraphs 38 and 38A ; and

(f)             a statement of financial position as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements in accordance with paragraphs 40A–40D .

An entity may use titles for the statements other than those used in this Standard. For example, an entity may use the title ‘statement of comprehensive income’ instead of ‘statement of profit or loss and other comprehensive income’.

An entity may present a single statement of profit or loss and other comprehensive income, with profit or loss and other comprehensive income presented in two sections. The sections shall be presented together, with the profit or loss section presented first followed directly by the other comprehensive income section. An entity may present the profit or loss section in a separate statement of profit or loss. If so, the separate statement of profit or loss shall immediately precede the statement presenting comprehensive income, which shall begin with profit or loss.

An entity shall present with equal prominence all of the financial statements in a complete set of financial statements.

Many entities present, outside the financial statements, a financial review by management that describes and explains the main features of the entity’s financial performance and financial position, and the principal uncertainties it faces. Such a report may include a review of:

(a)             the main factors and influences determining financial performance, including changes in the environment in which the entity operates, the entity’s response to those changes and their effect, and the entity’s policy for investment to maintain and enhance financial performance, including its dividend policy;

(b)             the entity’s sources of funding and its targeted ratio of liabilities to equity; and

(c)             the entity’s resources not recognised in the statement of financial position in accordance with Australian Accounting Standards.

Many entities also present, outside the financial statements, reports and statements such as environmental reports and value added statements, particularly in industries in which environmental factors are significant and when employees are regarded as an important user group. Reports and statements presented outside financial statements are outside the scope of Australian Accounting Standards.

General features

Fair presentation and compliance with standards.

Financial statements shall present fairly the financial position, financial performance and cash flows of an entity. 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 Conceptual Framework for Financial Reporting ( Conceptual Framework ). The application of Australian Accounting Standards, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation.

Notwithstanding paragraph 15 , in respect of AusCF entities, financial statements shall present fairly the financial position, financial performance and cash flows of an entity. 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 Framework . [AusCF2]  The application of Australian Accounting Standards, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation.

An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes. An entity shall not describe financial statements as complying with IFRSs unless they comply with all the requirements of IFRSs.

Paragraphs AusCF15–AusCF24 contain references to the objective of financial statements set out in the Framework for the Preparation and Presentation of Financial Statements (as identified in AASB 1048 ). In December 2013 the AASB amended the Framework , and thereby replaced the objective of financial statements with the objective of general purpose financial reporting: see Chapter 1 of the Framework .

[Deleted by the AASB]

Not-for-profit entities need not comply with the paragraph 16 requirement to make an explicit and unreserved statement of compliance with IFRSs.

In virtually all circumstances, an entity achieves a fair presentation by compliance with applicable Australian Accounting Standards. A fair presentation also requires an entity:

(a)             to select and apply accounting policies in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors . AASB 108 sets out a hierarchy of authoritative guidance that management considers in the absence of an Australian Accounting Standard that specifically applies to an item.

(b)             to present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information.

(c)             to provide additional disclosures when compliance with the specific requirements in Australian Accounting Standards 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.

An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory material.

In the extremely rare circumstances in which management concludes that compliance with a requirement in an Australian Accounting Standard would be so misleading that it would conflict with the objective of financial statements set out in the Conceptual Framework , the entity shall depart from that requirement in the manner set out in paragraph 20 if the relevant regulatory framework requires, or otherwise does not prohibit, such a departure.

Notwithstanding paragraph 19 , in respect of AusCF entities, in the extremely rare circumstances in which management concludes that compliance with a requirement in an Australian Accounting Standard would be so misleading that it would conflict with the objective of financial statements set out in the Framework , the entity shall depart from that requirement in the manner set out in paragraph AusCF20 if the relevant regulatory framework requires, or otherwise does not prohibit, such a departure.

In relation to paragraph 19 , the following shall not depart from a requirement in an Australian Accounting Standard:

(a)             entities required to prepare financial reports under Part 2M.3 of the Corporations Act;

(b)             private and public sector not-for-profit entities; and

(c)             entities applying Australian Accounting Standards – Simplified Disclosures.

When an entity departs from a requirement of an Australian Accounting Standard in accordance with paragraph 19 , it shall disclose:

(a)             that management has concluded that the financial statements present fairly the entity’s financial position, financial performance and cash flows;

(b)             that it has complied with applicable Australian Accounting Standards, except that it has departed from a particular requirement to achieve a fair presentation;

(c)             the title of the Australian Accounting Standard from which the entity has departed, the nature of the departure, including the treatment that the Australian Accounting Standard would require, the reason why that treatment would be so misleading in the circumstances that it would conflict with the objective of financial statements set out in the Conceptual Framework , and the treatment adopted; and

(d)             for each period presented, the financial effect of the departure on each item in the financial statements that would have been reported in complying with the requirement.

Notwithstanding paragraph 20 , in respect of AusCF entities, when an entity departs from a requirement of an Australian Accounting Standard in accordance with paragraph AusCF19 , it shall disclose:

(c)             the title of the Australian Accounting Standard from which the entity has departed, the nature of the departure, including the treatment that the Australian Accounting Standard would require, the reason why that treatment would be so misleading in the circumstances that it would conflict with the objective of financial statements set out in the Framework , and the treatment adopted; and

When an entity has departed from a requirement of an Australian Accounting Standard in a prior period, and that departure affects the amounts recognised in the financial statements for the current period, it shall make the disclosures set out in paragraph 20(c) and (d) .

Paragraph 21 applies, for example, when an entity departed in a prior period from a requirement in an Australian Accounting Standard for the measurement of assets or liabilities and that departure affects the measurement of changes in assets and liabilities recognised in the current period’s financial statements.

In the extremely rare circumstances in which management concludes that compliance with a requirement in an Australian Accounting Standard would be so misleading that it would conflict with the objective of financial statements set out in the Conceptual Framework , but the relevant regulatory framework prohibits departure from the requirement, the entity shall, to the maximum extent possible, reduce the perceived misleading aspects of compliance by disclosing:

(a)             the title of the Australian Accounting Standard in question, the nature of the requirement, and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Conceptual Framework ; and

(b)             for each period presented, the adjustments to each item in the financial statements that management has concluded would be necessary to achieve a fair presentation.

Notwithstanding paragraph 23 , in respect of AusCF entities, in the extremely rare circumstances in which management concludes that compliance with a requirement in an Australian Accounting Standard would be so misleading that it would conflict with the objective of financial statements set out in the Framework , but the relevant regulatory framework prohibits departure from the requirement, the entity shall, to the maximum extent possible, reduce the perceived misleading aspects of compliance by disclosing:

(a)             the title of the Australian Accounting Standard in question, the nature of the requirement, and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework ; and

For the purpose of paragraphs 19–23 , an item of information would conflict with the objective of financial statements when it does not represent faithfully the transactions, other events and conditions that it either purports to represent or could reasonably be expected to represent and, consequently, it would be likely to influence economic decisions made by users of financial statements.   When assessing whether complying with a specific requirement in an Australian Accounting Standard would be so misleading that it would conflict with the objective of financial statements set out in the Conceptual Framework , management considers:

(a)             why the objective of financial statements is not achieved in the particular circumstances; and

(b)             how the entity’s circumstances differ from those of other entities that comply with the requirement.   If other entities in similar circumstances comply with the requirement, there is a rebuttable presumption that the entity’s compliance with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Conceptual Framework .

Notwithstanding paragraph 24 , in respect of AusCF entities, for the purpose of paragraphs AusCF19–AusCF23 , an item of information would conflict with the objective of financial statements when it does not represent faithfully the transactions, other events and conditions that it either purports to represent or could reasonably be expected to represent and, consequently, it would be likely to influence economic decisions made by users of financial statements. When assessing whether complying with a specific requirement in an Australian Accounting Standard would be so misleading that it would conflict with the objective of financial statements set out in the Framework , management considers:

(b)             how the entity’s circumstances differ from those of other entities that comply with the requirement.   If other entities in similar circumstances comply with the requirement, there is a rebuttable presumption that the entity’s compliance with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework .

Going concern

When preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties. When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern.

In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period. The degree of consideration depends on the facts in each case. When an entity has a history of profitable operations and ready access to financial resources, the entity may reach a conclusion that the going concern basis of accounting is appropriate without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.

Accrual basis of accounting

An entity shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting.

When the accrual basis of accounting is used, an entity recognises items as assets, liabilities, equity, income and expenses (the elements of financial statements) when they satisfy the definitions and recognition criteria for those elements in the Conceptual Framework .

Notwithstanding paragraph 28 , in respect of AusCF entities, when the accrual basis of accounting is used, an entity recognises items as assets, liabilities, equity, income and expenses (the elements of financial statements) when they satisfy the definitions and recognition criteria for those elements in the Framework . [AusCF3]

The Framework for the Preparation and Presentation of Financial Statements was amended by the AASB in December 2013.

Materiality and aggregation

An entity shall present separately each material class of similar items. An entity shall present separately items of a dissimilar nature or function unless they are immaterial.

Financial statements result from processing large numbers of transactions or other events that are aggregated into classes according to their nature or function. The final stage in the process of aggregation and classification is the presentation of condensed and classified data, which form line items in the financial statements. If a line item is not individually material, it is aggregated with other items either in those statements or in the notes. An item that is not sufficiently material to warrant separate presentation in those statements may warrant separate presentation in the notes.

When applying this and other Australian Accounting Standards an entity shall decide, taking into consideration all relevant facts and circumstances, how it aggregates information in the financial statements, which include the notes. An entity shall not reduce the understandability of its financial statements by obscuring material information with immaterial information or by aggregating material items that have different natures or functions.

Some Australian Accounting Standards specify information that is required to be included in the financial statements, which include the notes. An entity need not provide a specific disclosure required by an Australian Accounting Standard if the information resulting from that disclosure is not material. This is the case even if the Australian Accounting Standard contains a list of specific requirements or describes them as minimum requirements. An entity shall also consider whether to provide additional disclosures when compliance with the specific requirements in Australian Accounting Standards is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an Australian Accounting Standard.

An entity reports separately both assets and liabilities, and income and expenses. Offsetting in the statement(s) of profit or loss and other comprehensive income or financial position, except when offsetting reflects the substance of the transaction or other event, detracts from the ability of users both to understand the transactions, other events and conditions that have occurred and to assess the entity’s future cash flows. Measuring assets net of valuation allowances—for example, obsolescence allowances on inventories and doubtful debts allowances on receivables—is not offsetting.

AASB 15 Revenue from Contracts with Customers requires an entity to measure revenue from contracts with customers at the amount of consideration to which the entity expects to be entitled in exchange for transferring promised goods or services. For example, the amount of revenue recognised reflects any trade discounts and volume rebates the entity allows. An entity undertakes, in the course of its ordinary activities, other transactions that do not generate revenue but are incidental to the main revenue-generating activities. An entity presents the results of such transactions, when this presentation reflects the substance of the transaction or other event, by netting any income with related expenses arising on the same transaction. For example:

(a)             an entity presents gains and losses on the disposal of non-current assets, including investments and operating assets, by deducting from the amount of consideration on disposal the carrying amount of the asset and related selling expenses; and

(b)             an entity may net expenditure related to a provision that is recognised in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets and reimbursed under a contractual arrangement with a third party (for example, a supplier’s warranty agreement) against the related reimbursement.

In addition, an entity presents on a net basis gains and losses arising from a group of similar transactions, for example, foreign exchange gains and losses or gains and losses arising on financial instruments held for trading. However, an entity presents such gains and losses separately if they are material.

Frequency of reporting

An entity shall present a complete set of financial statements (including comparative information) at least annually. When an entity changes the end of its reporting period and presents financial statements for a period longer or shorter than one year, an entity shall disclose, in addition to the period covered by the financial statements:

(a)             the reason for using a longer or shorter period, and

(b)             the fact that amounts presented in the financial statements are not entirely comparable.

Normally, an entity consistently prepares financial statements for a one-year period. However, for practical reasons, some entities prefer to report, for example, for a 52-week period. This Standard does not preclude this practice.

Comparative information

Except when Australian Accounting Standards permit or require otherwise, an entity shall present comparative information in respect of the preceding period for all amounts reported in the current period’s financial statements. An entity shall include comparative information for narrative and descriptive information if it is relevant to understanding the current period’s financial statements.

An entity shall present, as a minimum, two statements of financial position, two statements of profit or loss and other comprehensive income, two separate statements of profit or loss (if presented), two statements of cash flows and two statements of changes in equity, and related notes.

In some cases, narrative information provided in the financial statements for the preceding period(s) continues to be relevant in the current period. For example, an entity discloses in the current period details of a legal dispute, the outcome of which was uncertain at the end of the preceding period and is yet to be resolved. Users may benefit from the disclosure of information that the uncertainty existed at the end of the preceding period and from the disclosure of information about the steps that have been taken during the period to resolve the uncertainty.

An entity may present comparative information in addition to the minimum comparative financial statements required by Australian Accounting Standards, as long as that information is prepared in accordance with Australian Accounting Standards. This comparative information may consist of one or more statements referred to in paragraph 10 , but need not comprise a complete set of financial statements. When this is the case, the entity shall present related note information for those additional statements.

For example, an entity may present a third statement of profit or loss and other comprehensive income (thereby presenting the current period, the preceding period and one additional comparative period). However, the entity is not required to present a third statement of financial position, a third statement of cash flows or a third statement of changes in equity (ie an additional financial statement comparative). The entity is required to present, in the notes to the financial statements, the comparative information related to that additional statement of profit or loss and other comprehensive income.

An entity shall present a third statement of financial position as at the beginning of the preceding period in addition to the minimum comparative financial statements required in paragraph 38A if:

(a)             it applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial statements or reclassifies items in its financial statements; and

(b)             the retrospective application, retrospective restatement or the reclassification has a material effect on the information in the statement of financial position at the beginning of the preceding period.

In the circumstances described in paragraph 40A , an entity shall present three statements of financial position as at:

(a)             the end of the current period;

(b)             the end of the preceding period; and

(c)             the beginning of the preceding period.

When an entity is required to present an additional statement of financial position in accordance with paragraph 40A , it must disclose the information required by paragraphs 41–44 and AASB 108 . However, it need not present the related notes to the opening statement of financial position as at the beginning of the preceding period.

The date of that opening statement of financial position shall be as at the beginning of the preceding period regardless of whether an entity’s financial statements present comparative information for earlier periods (as permitted in paragraph 38C ).

If an entity changes the presentation or classification of items in its financial statements, it shall reclassify comparative amounts unless reclassification is impracticable. When an entity reclassifies comparative amounts, it shall disclose (including as at the beginning of the preceding period):

(a)             the nature of the reclassification;

(b)             the amount of each item or class of items that is reclassified; and

(c)             the reason for the reclassification.

When it is impracticable to reclassify comparative amounts, an entity shall disclose:

(a)             the reason for not reclassifying the amounts, and

(b)             the nature of the adjustments that would have been made if the amounts had been reclassified.

Enhancing the inter-period comparability of information assists users in making economic decisions, especially by allowing the assessment of trends in financial information for predictive purposes. In some circumstances, it is impracticable to reclassify comparative information for a particular prior period to achieve comparability with the current period. For example, an entity may not have collected data in the prior period(s) in a way that allows reclassification, and it may be impracticable to recreate the information.

AASB 108 sets out the adjustments to comparative information required when an entity changes an accounting policy or corrects an error.

Consistency of presentation

An entity shall retain the presentation and classification of items in the financial statements from one period to the next unless:

(a)             it is apparent, following a significant change in the nature of the entity’s operations or a review of its financial statements, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in AASB 108 ; or

(b)             an Australian Accounting Standard requires a change in presentation.

For example, a significant acquisition or disposal, or a review of the presentation of the financial statements, might suggest that the financial statements need to be presented differently. An entity changes the presentation of its financial statements only if the changed presentation provides information that is reliable and more relevant to users of the financial statements and the revised structure is likely to continue, so that comparability is not impaired. When making such changes in presentation, an entity reclassifies its comparative information in accordance with paragraphs 41 and 42 .

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What does "Fair Presentation" mean to your business?

Buyers of commercial insurance should be aware of the Insurance Act 2015 which affects all business insurance subject to the law of England, Scotland, Wales or Northern Ireland arranged or amended after 12 August 2016.

The change in law updates the legal framework to be more appropriate for modern business requirements. The key new requirement that businesses need to be aware of is the Duty of Fair Presentation.

The law is being updated to make it simpler and easier for businesses to get claims paid by insurers and to assist insurers, brokers and customers ensure that insurance contracts are fit for purpose.

In essence, businesses get fairer outcomes in the event of a claim, but only if they demonstrate an adequate approach to disclosing information about their risk to insurers before the insurance is agreed ñ in the form of the new Duty of Fair Presentation.

The key things to remember about Fair Presentation are:

• All commercial insurance arranged or amended after 12 August 2016 will be affected, so businesses should start to prepare now.
• It builds on existing underwriting practices, but is more process focused than the duty of disclosure it replaces.
• It should not mean reinventing the wheel ñ building on existing practices and internal information processes is key to avoid unnecessary business disruption.
• Successful Fair Presentation is measured in relation to your specific business, not a standardised checklist

The central requirement of Fair Presentation is still to share all material facts, accurately and in good faith. However the new duty introduces some new concepts:

Material accuracy and good faith

• The core requirements from you essentially remain unchanged ñ you need to take reasonable steps to ensure information provided when seeking insurance is accurate and complete to the best of your knowledge.
• The Act also specifies examples of important details to include, such as special or unusual details of the business or existing areas of concern relating to the types of risk covered by the insurance.

Whose knowledge to include

• The relevant knowledge of senior management ñ defined as the key individuals who decide how the business is run.
• If the risk and insurance team (or individual buying the insurance) is separate to senior management then their knowledge must also be included.
• In addition your insurance brokerís relevant knowledge should also be included.

Reasonable search

• Sufficient enquiries to build a picture of your risk must also be conducted and material information arising must be included. This may include enquiries made of external parties such as managing agents, accountants, solicitors or your insurance broker.

Clear and accessible presentation

• The presentation of information should include adequate signposting and flag important points to insurers.
• Data dumping is prohibited.

Insurer duties

• Information that an insurer should know does not need to be included in the presentation, but check with them before omitting any risk information
• Insurers will make further enquiries if there are obvious omissions, questions or gaps to the information presented.

Taken together this means there will be more focus on the information gathering process not just the facts themselves

BE PREPARED: INSURERS KEY EXPECTATION

Each Fair Presentation will be unique and specific to a business ñ whatís reasonable for one business may not be reasonable for another. However insurers expectations for customers are guided by the same principles. These are the key areas you should consider:

1. Audit trail of how risk information is put together

• Principal requirement is for you to have an audit trail of how the information was gathered.
• Who is consulted.
• What information is asked for.
• How information is collated and checked.

2. Accurate and complete information

• The core information we ask for as part of proposal forms or insurance submissions (such as claims information or asset value) will continue to lie at the core of a Fair Presentation and should be complete as accurately and fully as possible.

3. Flag changes and differences

• In addition to answering our questions you must flag special or unusual facts about the risk.
• These will be unique to your business but could for example include:
• Operational factors which make your business different from competitors or industry standards.
• Recent or planned business developments such as new products and services, acquisitions, customers or contracts, which will affect your risk profile.
• Known issues where you already have a concern about the potential for increased risk in future.
• Changes in business operations, which might not be fully explained in the standard underwriting information such as business units with different working practices.
• For all changes it is important to describe the circumstances and what you think the risk impact could be.

4. Well-structured information

• The presentation should include clear structuring and signposting of key information.
• For larger more complex businesses, with extensive information sets, an executive summary and detailed contents page would be expected.

5. Ongoing notification of changes

• Having an ongoing process in place to monitor and flag fundamental changes to your risk during the period of the policy is important, as this could change your insurance needs.

6. Additional enquiries

• It is critical to consider the range of people you need to consult within the business. This will naturally be specific to your business but could include:
• Who counts as senior management may differ by type of risk but as well as directors it is likely to include line management and those who control policies affecting risk or with specific risk management responsibilities.
• Relevant third parties who also hold information on your risk ñ like outsourced service providers (e.g. property managing agents, IT providers or facilities management) or the knowledge of your broker (e.g. survey reports, claims data or sector specific risk knowledge).
• For such enquiries you should record not just the information identified but also the list of consultees and reasoning behind their selection.

7. Build on existing processes

• Current processes can be enhanced by adding more detail, thinking through the list of individuals consulted and including supplementary explanatory notes where necessary.
• Drawing on and adapting existing internal sources of information ñ such as board reporting, risk or contract registers ñ to build the more detailed information set that Fair Presentation requires.
• Recording and explaining the current enquiries made.

For more information please do not hesitate to contact ourselves.

Source: www.rsabroker.com/system/files/The Insurance Act – What does Fair Presentation mean for your business March 2016.pdf

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