Seeking a ‘true and fair’ view

Press, 13 December 1989, Page 45

Seeking a ‘true and fair’ view

The financial statements of companies must be related to the marketplace, says Professor Peter Wolnizer.

The professor of accounting and finance at Deakin University in Geelong, Australia, was in Christchurch on Monday to present a paper for Canterbury University’s accountancy department’s research seminar programme.

His paper, entitled “A true and fair view of financial position,” addresses the problem of valuing a company and its assets and reporting its financial condition when measurements are relative.

For financial statements to have contemporary relevancy assets must be valued on current market prices, he says. Assets should only be written up in the balance sheet if there is a price for them. The valuations should also be validated by independent sources of evidence. If the books showed the selling price of assets reported, auditing would be a far more rigorous safeguard because the auditors would have recourse to independent evidence, says Professor Wolnizer.

He is pleased that New

Zealand’s draft companies act proposed by the Law Commission retains for financial reporting the “true and fair” quality requirement, which, he says, has been an overriding feature in company legislation since the Joint Stock Companies Act of 1844.

However, Professor Wolnizer says that there has been little commentary on the things that the accounts give a “true and fair” view of — profit and loss and financial position, for instance.

Financial position remains undefined in the draft companies act. In a survey of 5700 business respondents in six countries, 80 to 90 per cent thought that financial position was best measured by what assets would realise if sold. “The dominant feature of a balance sheet is that it relates to affairs at a stated date, to assets and obligations and their money amounts at that date. In principle then, any money amount that relates to previous or subsequent dates is untrue as of the balance sheet date,” says Professor Wolnizer.

The conventional balance sheet may contain up-to-date monetary amounts and other

amounts that are based on costs that may be months, years, even decades out of date, he says.

Reports also inevitably contained management expectations. The present predicament of several former high-flying Australian companies highlighted the deficiencies in their financial reporting. Those companies’ inability to pay off debt indicated that the true test of solvency was not shown in their accounts. In the case of Bond Corporation’s record sAustl.6 billion loss, roughly a third of the red

ink came from writing off future income tax benefits which had been entered in the accounts as assets.

In Australia- it was common for trade marks, brand names and other intangibles to be written up as assets. But this can lead to asset values being overstated, he says.

Professor Wolnizer expects more examples of precarious solvency to arise in Australia.

While pleased that the draft companies act keeps the “true and fair” requirement, he says he would be delighted if it is defined.

So many optional valuation rules exist there is no standardisation now, he says.

“The only feature of conventional accounting that can be considered to be well established is that companies may choose as they will from the battery of optional rules that constitute the lore of conventional accounting.”

What then is his solution?

“No balance sheet shall be deemed or declared to give a true and fair view of the state of affairs of a company unless the amounts shown for the several assets other than cash and amounts receivable, are the best avail-

able approximations to the net selling prices in the ordinary course of business of those assets in their state and condition as at the date of the balance sheet.” Put another way, market value.

The other leg of Professor Wolnizer’s recommendation states: “No profit and loss account shall be deemed or declared to give a true and fair view of the profit and loss of a company unless that profit or loss is so calculated as to include the effects during the year of changes in the net selling prices of assets and of changes in the general purchasing power of the unit of account.”

If adopted the recommendation has the potential to reduce the regulatory infrastructure and the effort going into setting accounting standards, he says.

Accounts should meet a quality test which surpasses financial standards, Professor Wolnizer says.