UK: England and Wales: financial reporting and the true and fair view

Last year the Financial Reporting Council published a legal opinion written by Martin Moore QC concerning the status of the 'true and fair' concept in UK financial reporting. In his opinion, Mr Moore QC endorsed the analysis contained in earlier legal opinions written by Lord Hoffmann and Dame Mary Arden and observed that the 'true and fair' concept "...remains at the heart of the preparation of financial statements. It can aptly be described as an overarching concept which should inform all decisions by the preparers of such statements" (para. 46). 

Against this background, the judgment of Mr Justice Andrew Smith in Macquarie Internationale Investments Ltd v Glencore UK Ltd [2009] EWHC 2267 (Comm), handed down yesterday, is interesting and important. The judgment contains discussion of the application of accounting principles, Financial Reporting Standards (FRSs) and the relationship between the 'true and fair' concept and FRSs. This makes the case unusual because such issues are not often considered by the courts.  

The case concerned a claim for damages by Macquarie against Glencore for breach of warranties in a sale and purchase agreement for the acquisition by Macquarie of the shares in Corona Energy Holdings Ltd. The warranties provided that accounts had been prepared in accordance with relevant accounting standards and gave a true and fair view of assets and liabilities. Macquarie claimed that Corona's subsidiaries had incurred charges that were not recognised in the relevant accounts and, had they known about these charges, they would have paid less for the shares. The trial judge found Glencore not in breach of the warranties and, in the course of his judgment, observed: 

[Para. 106] ... in order for an item to be recognised as an asset or a liability there should be sufficient evidence of its existence. No doubt evidence will be sufficient for this purpose if, while not itself demonstrating the existence of the item, it sufficiently indicates it to call for enquiries about the position and reasonable and proportionate enquiries would provide sufficient evidence of its existence. But it does not seem to me that extravagant and disproportionate investigations are demanded, or that there is sufficient evidence of an item if its existence might be established only by investigations which the entity or those preparing its financial statements could not be expected to conduct if exercising reasonable diligence and making sensible enquiries.

[Para. 166] ... Although it might be that the quality of being "true" is directed to the accuracy of statements of fact and the quality of being "fair" reflects that accounts involve matters of assessment and judgment, it would be an arid and unhelpful exercise to decide whether financial statements are (i) true and (ii) fair as if they were separate questions. The sensible and generally accepted approach is to recognise that "true and fair" is a composite phrase, and the requirement that financial statements be "true and fair" is a single, indivisible requirement.

[Paras. 167-169] The concept of a "true and fair view" was considered by Mr. Leonard Hoffmann QC and Ms Mary Arden in a Joint Opinion written for the Accounting Standards Committee (the predecessor of the Accounting Standards Board) and dated 13 September 1983 ... [The] Joint Opinion ... explains why the "true and fair" concept necessarily relates to the expectations that accounting practices generate. It is of some interest that Mr Hoffmann and Ms Arden recognise that the application of the "true and fair" concept involves "judgment in questions of degree" and observe that cost-effectiveness is relevant to deciding what information is required in order to prepare financial statements that give a true and fair view. So too, as I have explained, it seems to me that both judgment and the cost-effectiveness and proportionality of potential investigations are relevant to deciding whether there is sufficient evidence to recognise an item as an asset or a liability. None of this means that financial statements that are prepared in accordance with FRSs necessarily give a true and fair view.

[Para 170] ... I find it difficult to envisage circumstances in which, because an entity has no or no sufficient evidence of a liability and therefore does not provide for it in its financial statements, they would on that account fail to give a true and fair view of the entity's financial position. I have already concluded that the Accounts were prepared in accordance with Relevant Accounting Standards, and I cannot accept that, this being so, the Accounts did not give a true and fair view of the assets and liabilities ...".