Question

Describe what true and fair override means and explain the reasons that it is good and reasons it is bad

Answer 1

True and fair override means circumstances where compliance with laid down accounting standard requirements under GAAP will not result in a true and fair representation of the substance of the transaction entered into. i.e. accounting for the transactions as per GAAP will distort the substance of the transactoin. Therefore, though technically, requirement of the standard has been complied with, the true and fair picture of the transaction is not reflected in the books of account.

GAAP states that true and fair picture is the overarching concept for GAAP. Though it is not expected that compliance with standards with distort the true and fair representation of the transaction, the standard setters do appreciate that there may be such exceptional situations and therefore, state that the the principle of true and fair representation of the transaction will over ride the requirements of the standards as well. It is therefore, good, because it helps avoid a situation wherein entities technically comply with the requirement of the standard but financial statements do not reflect a true and fair view.

On the flip side, true and fair view is a very subjective term and therefore, can be prone to misuse. This, is the key reason why true and fair override can be bad.

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