true and fair view
Roderick Ramage, solicitor, www.law-office.co.uk
published in New Law Journal (www.newlawjournal.co.uk) on 27 October 2017
This article is not advice to any
person and may not be taken as a definitive statement of the law in general or
in any particular case. The author does not accept any
responsibility for anything that any person does or does not do as a result of reading it.
The Companies Act 2006, s393(1), reads: ‘The directors of a
company must not approve accounts for the purposes of this Chapter unless they
are satisfied that they give a true and fair view of the
assets, liabilities, financial position and profit or loss …’.
What meaning should the law give to the expression “true
starting point for the interpretation of statutes is at 332 in Macarthys Ltd v Smith  3 All ER 325:
the meaning of the words [Equal Pay Act 1970, s1(1) and (2)] is clear, and no
ambiguity, whether patent or latent, lurks within them, under our rules for the
construction of Acts of Parliament the statutory intention must be found within
means of finding the meaning of the words “true and fair view” are these.
The Shorter OED
True: ‘Consistent with fact; agreeing with reality;
representing the thing as it is.’.
Fair: ‘Free from bias, fraud, or injustice; equitable,
View: ‘A particular manner of way of considering or regarding
a matter or question; a conception opinion or theory formed by
reflection or theory. An aspect or light
in which something is regarded or considered.’
The joint opinion of Leonard Hoffman QC and
Mary H Arden (as they both then were)
joint opinion of 13 September 1988 was
given to the Accounting Standards Committee, now the Accounting Standards Board
((“ASC” and “ASB”)
True and fair view:
courts have never attempted to define “true and fair” in the sense of offering
a paraphrase in other languages and in our opinion
have been wise not to do so. When a
concept can be expressed in ordinary English words, we do not think that it
illuminates their meaning to attempt to frame a definition.’
accountants are professionally obliged to comply with a SSAP [Statement of
Standard Accounting Practice], it creates in the readers an expectation that
the accounts will be in conformity with the prescribed standards. This is in itself a reason why accounts which
depart from the standard without adequate justification or explanation may be
held not to be true and fair.’
short, they say that the words have their ordinary meaning, but accounts which
are not in accordance with the accounting standards are prime facie not true
opinion is the first of a series of opinions, of which those addressed to the
ASB broadly confirm the original joint opinion.
The prevailing practices of accountants, informed by the above and subsequent
opinions, was questioned by George Bompas QC in his
opinion of March 2013 addressed to the UK Shareholders’ Association, in which
he concluded that there is a tension between the requirements of the International
Accounting Standards and the statutory true and fair obligation. The controversy continues and can be followed
in the opinions available at the following link.
are learned opinion by highly regarded counsel, in comparison to which this
article consists of merely the simple thoughts of a solicitor on the Clapham
these two, it is not the unadorned dictionary meaning of a true and fair view
that companies follow, but the meaning that accountants give those words with
the support of the support of the Hoffman/Arden and later opinions.
the difference between these approaches to the meaning of true and fair by two examples,
the first looking at the reasoning of the joint opinion, based on historic cost
accounting and the second the effect of the accounting standards in their treatment
of pension schemes in company accounts.
1 : current or historic cost accounting
2 of the joint opinion explained, as background, that the ASC had decided that
future standards would deal with matters of ‘major and fundamental importance’ but
that standards would continue to apply ‘to all accounts intended to show a true
and fair view’. This paragraph concluded
with the writers’ understanding of the ASC’s opinion expressed as follows.
A SSAP is therefore a declaration by
the ASC, on behalf of its constituent professional bodies, that save in
exceptional circumstances accounts which do not comply with the standard will
not give a true and fair view.
paragraph 8, which appears to be the heart of the joint opinion, the writers
say that, in judging whether accounts give a true and fair view, the courts
would look to the ordinary practices of accountants, and that
will not be true and fair unless the information they contain is sufficient in
quantity and quality to satisfy the reasonable expectations of the readers to
whom they are
concluded in this paragraph that ‘the expectations of the readers will have
been moulded by the practices of accountants because by a large they will
expect get what they ordinarily get and that in turn will depend upon the
normal practices of accountants.’
words, the courts can be expected to decide that accounts are true and fair if
they reflect users’ expectations based on what accountants tell them to expect.
10 of the joint opinion contains the following passage in support of the
expectations argument in paragraph 8.
importance of expectations was emphasised by the Court of Appeal in what may be
regarded as a converse case, Re Press Caps  Ch.434. An ordinary historic
cost balance sheet was said to be "true and fair" notwithstanding
that it gave no information about the current value of freehold properties
because, it was said, no one familiar with accounting conventions would expect
it to include such information.
Press Caps Ltd was about a share scheme under s209 of the Companies Act 1948
(Power to acquire shares of shareholders dissenting from scheme or contract
approved by a majority, re-enacted in the CA 1985 s428 and repealed by the CA
2006). A minority shareholder claimed
that the terms of the scheme were unfair on the ground that
the balance sheet value of the company’s freehold property was shown at
£23,708, which was its cost less depreciation plus a small addition, whereas
its market value was about £90,000. The scheme
was based on a valuation of the shares in excess of
their market value on the Stock Exchange value, and the court held that it was
right to base the scheme on the Stock Exchange value. Moreover, obiter, the balance sheet showed
patents and goodwill at £45,115, while the evidence showed they were worth
nothing like that.
point however is that balance sheet values were considered solely in in
relation to the question, following re Hoare & Co Ltd  150 LT 374, whether
share scheme was unfair. The court did
not in any way, directly or indirectly consider the directors’ duty to produce
accounts that gave a true and fair view (then in the Companies Act 1948, s149). Nor did the court give any support to the arguments
in the joint opinion that the accounts should show the accounts in the way (in
this case the historic cost basis) that reflected the expectation of the users
nearest that the court came to this point, was the finding that,
this figure in the balance sheet in accordance with
what is very common practice does not appear (emphasis added) as a valuation of the property as at the date of
the balance sheet, but is cost less depreciation. Therefore, it does not seem
to me that there is anything misleading about it.
The point here had nothing to do with s149, but
solely that, in this context, the amount in the balance sheet did not purport
to be a valuation and that the dissenting member’s argument based the balance
sheet failed to show that the scheme was unfair.
2 : accounting for defined benefit pension schemes
this explanation, I assume that the pension scheme is a final salary or other
defined benefit scheme and that, as is the case for most of these schemes, it
is in deficit.
Shareholders and managers of companies,
lenders and other people dealing with them and pension scheme members need the
following information about a company and its pension scheme:
first whether the company, as long as it
continues in business, can afford to fund the scheme sufficiently to enable it
to meet its liabilities as and when they become payable and to continue to do
so for the whole, or at least the foreseeable, life of the scheme; and
secondly whether, if a debt under s75 of the Pensions
Act 1995, becomes payable (typically when the company becomes insolvent and the
pension scheme must be wound up or one employer in a multi-employer scheme
ceases to be an employer in relation to the scheme) and members’ benefits must
be fully secured with an insurance company, the company will have sufficient
assets to discharge the debt.
meaning of “fair and true” were governed by the ordinary meaning of the words, a
company’s accounts would provide the above information. However, accounts prepared in accordance
with the present accounting standards, which are in FRS 102 (Financial
Reporting Standards issued by the Financial Reporting Council in September 2015)
do not attempt or even pretend to provide this information.
FRS 102 requires the company to show (a) in its balance sheet the value of the
scheme’s liabilities, calculated on a specified actuarial basis, less the market
value of the scheme’s assets and (b) in the P&L account (or income
statement) the cost of the scheme as, mainly, the change in the deficit since
the previous year end plus interest on the deficit for the year.
only do accounts drawn in accordance with FRS 102 fail to give information that
people need, but they are misleading in at least following ways.
The deficit is shown as a liability in the balance sheet. A normal lay (and legal) understanding of a
liability is that it is something that the company must pay, now or in the
future, but the company cannot in any circumstances be liable to pay the FRS
deficit. It is not a debt, ie it is not
“real”, but is a mathematical calculation based on assumptions of future
interest rates, investment returns, longevity etc. The only normally liability on the employer
is to pay contributions.
If the scheme is to be wound up, the amount to be paid to secure
the scheme’s liabilities will be a “real” amount, because money must be paid to
an insurance company to secure member’s benefits; and the amount to be paid is almost
certainly to be very much higher than the deficit calculated under FRS102.
The cost to be shown in the P&L account is the difference
between the present deficit and the corresponding amount at the end of the
previous year, which bears no relationship to an estimated annual amount
necessary to ensure the scheme will be able to pay its obligations as they fall
is an actuary’s rule of thumb, which illustrates the artificiality of the FRS
method. It is that, if interest rates
increase by a 1% point, the amount of a more or less typical
mature scheme’s liabilities calculated actuarially will decrease by 12%, and
conversely if interest rates drop. If there were such an increase in interest
rates during the accounting year, the balance sheet will, at the end of the year,
show a reduced deficit or even a surplus and the P&L account will show a reduced
cost or even a gain, even though neither the scheme’s investments nor its
liability to pay pensions will have altered.
amongst lawyers and in the pensions industry might suspect that the need in
Wall Street and the Square Mile to eliminate uncertainty and accountants’
collective wish to future-proof businesses against risk, influenced the development
of an accounting standard, the natural consequence of which is the closure of
DB pension schemes and so to enable employers to shift the risks of (mainly)
longevity and investment returns from themselves to their present and former
employees. Kindlier readers might merely
be amused to compare accountants with Alice in Wonderland in her conversation
at the Mad Hatter’s tea party, at which the March Hare said, ‘You should say
what you mean’, to which Alice replied, ‘I mean what I say – that’s the same
thing, you know.’
copyright Roderick Ramage
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