Faithful representation

Faithful representation is an accounting concept (or principle) that entails that an entity’s financial statements shall be prepared and produced in a manner that accurately reflects the real state of affairs of that entity and the conditions in which it operates. In other words, faithful representation entails that financial statements shall be accurately produced as a complete reflection of the condition and state of affairs of an entity. According to accounting frameworks, useful information possess the qualitative characteristics of being relevant and faithfully representing the underlying event or transaction. The financial information, including figures and narrations shall communicate the underlying economic reality of such an event/ transaction.

Overall, the representation of financial information must be possess the three principal qualities: completeness, neutrality and freedom from error (material error). Completeness implies that all the information that a user of the entity’s financial statements seeks to have about the economic phenomena is accounted for and factored in. Neutrality means that the representation is unbiased, but rather is based on objective facts and inputs. Furthermore, the information representation shall neither be overly optimistic nor overly pessimistic. Freedom from error means that such information do not involve any errors in the depiction which would result in a different economic decision. Nevertheless, the information does not have to be infallible or perfectly accurate, but it has to be of good quality (precision) for decision-making purposes.

Specifically, this implies that the information presented in the financial statements should reflect the transactions and events that occur during a period in a manner that represents their true economic substance rather than merely their legal form. In which case, if the substance of a transaction differs from its legal form, then the entity shall consider it (and account for it) in accordance with its economic reality, in order to present a true and fair view. For example, if an entity reports on its statement of financial position an amount of CU 1 million of accounts receivable as at year-end, then that amount should be present on that specific date.

Fair presentation

Fair presentation is an accounting standards’ requirement that an entity’s financial statements should be presented in a fair way to all relevant users of these statements. It entails that the financial statements must present fairly the financial position, financial performance and cash flows of the entity.

In other words, it is premised on the requirement that these statements should not be misleading. Under the principle of fair presentation, financial statements must fairly present the financial position, financial performance and cash flows of the entity. Fair presentation requires the faithful (unbiased) representation of the monetary effects of transactions, other events and circumstances in accordance with the applicable concepts and recognition criteria for assets, liabilities, income and expenses.

Fair presentation is the US and International Accounting Standards (IAS) equivalent of the British requirement that financial statements provide a true and fair view (which entails that statements/ accounts have been truly prepared and fairly presented in accordance with applicable accounting standards and framework. It also implies that the financial statements are free from material misstatements and faithfully represent the financial position and performance of an entity, subject-matter of an audit process.).