Peeling away financial reporting issues one layer at a time

IAS 1: The Myth of ‘Fair Presentation’

I speak U.S. GAAP most of the time, so when I prepare to deliver courses on International Financial Reporting Standards (IFRS or IAS are basically interchangeable acronyms), I begin by re-reading some of the key standards, focusing especially on those that may have been recently revised.  That took me to IAS 1 this evening (and by the way, one of my recent posts was on one of the recent changes to that standard).

This current post is about a portion of IAS 1 that has survived since the original version was published in 1974.  It is no different from U.S. GAAP in any important sense, but the language makes a better target for me to tell you about one of my pet accounting peeves:

"Financial statements should present fairly the financial position, financial performance and cash flows of an enterprise. The appropriate application of International Accounting Standards, with additional disclosure when necessary, results, in virtually all circumstances, in financial statements that achieve a fair presentation."(IAS 1, para. 10)

In other words, "fair presentation" can only mean compliance with the rules of IAS.  There is no difference between a statement claiming "fair presentation in accordance with IAS" and "presentation in accordance with IAS."  Since both statements mean the same thing, inclusion of the word "fair" is just another pretentious device to make IAS seem more than it is–to wit that financial statements presented in accordance with IAS are merely the output of an exercise in following rules. It is patently clear that some of these rules unfairly obfuscate and misstate (see my post on IAS 23); and other rules, by their construction, make it impossible to determine fairness (see my post on IAS 21 and FAS 52 as well as my earlier post on IAS 1).

But what about the phrase "virtually all circumstances," you ask?  If application of a rule does not result in fair presentation, doesn't IAS require–or at least provide an opportunity–to fix things?  Answer: that's just another red herring.  Ask any Big Four auditor, and they will tell you that they allow no departure from the rules, if you want a 'clean' opinion–and the same goes for U.S. GAAP.

One of my late great teachers was fond of saying that "fairness is not an economic concept."  As much as the IASB and FASB would like us to think otherwise, it's not an accounting concept either.  I'm not saying that financial statements aren't useful, but I am saying that, given the rules we have, it is not reasonable (in fact, impossible) to regard them as "fair"–especially in the way that regular folks understand the term. 

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