European harmonization and the true and fair view

Abstract

In all financial statements the amount of flexibility which can be exercised in presentation is limited by accounting regulations, one of the purposes of which is to ensure comparability across firms. This has given rise to a debate within the UK and the EU as to the optimum balance between flexibility and comparability. This study uses the evolution of UK accounting policy for long-term contracts as a vehicle for investigating the role of the true and fair view (TFV) in the develop-ment of this debate. Within the context of EU harmonization insight is also obtained into the consequences of using accounting bases for assessing tax liab-ilities. The role of TFV in UK accounting is assessed by analysis of the Accounting Standards Committee (ASC) Archive and the responses to ASC exposure drafts. Net costs of compliance with regulated requirements are identi-fied and the ranking obtained is used to test the sensitivity of compliance by com-panies during 1981–90 to changes in the costs of compliance, particularly with regard to differing interpretations of EU requirements by the ASC and the Department of Trade and Industry. The findings are that, contrary to a widely held view, the TFV plays a central role in shaping UK accounting policy by pre-serving the traditional flexibility in the application of accounting conventions. It is concluded that a shift to a narrow application of the TFV in exceptional cir-cumstances is now appropriate and that the task of accounting regulators, and the path towards harmonization, will be eased if accounting bases for recognition of income are not used for tax purposes.