22 October 2013

Economia/Percy: The trouble with true and fair

Barrister George Bompas QC published his opinion on the legality of IFRS in June. In it, he suggested that the controversial accounting standard IAS 39, Financial Instruments: Recognition and Measurement, may be in conflict with the ‘true and fair’ view requirement of the law by allowing unrealised mark-to-market ‘profits’ and mark-to-model ‘profits’ in valuations. He also highlighted that it doesn’t account for all likely losses nor deal with the distributability of profits.

It was Bompas’s view that the true and fair requirement of company law should override IFRS with respect to these deficiencies. On that basis, the Local Authority Pension Fund Forum (LAPFF) claimed that “the accounts of banks have been faulty since 2005, or even earlier, given that some IFRS measures had been incorporated early into Accounting Standards Board standards”. It made this claim despite the fact that the 2001 Fair Value Directive changed company law to allow unrealised gains on financial instruments to be shown in the profit and loss account when required by accounting standards. 

The seriousness of the issues raised by Bompas's opinion and the widespread implications for financial reporting if IFRS were to be found illegal in some way led the Department for Business, Innovation and Skills (D-BIS) and the Financial Reporting Council (FRC) swiftly to secure their own legal opinions. In October, consumer affairs minister Jo Swinson said D-BIS had given “serious consideration” to the issues raised by Bompas but concluded that IFRS was legally binding and the concerns raised by the investor group were “misconceived”. Meanwhile, the FRC turned to Martin Moore QC, the same barrister who wrote an opinion in 2008 confirming that ‘fair presentation’ under IAS 1, Presentation of Financial Statements, in IFRS is equivalent to a true and fair view in company law. 

The FRC published Moore’s latest opinion in October, which supported D-BIS’s view that IFRS is legally binding and compliance will result in a true and fair view in most circumstances. It added: “Where compliance with an accounting standard would result in accounts that would be so misleading that they would conflict with the objective of financial statements, the standard should be overridden".

So, after all that to-ing and fro-ing, aren’t we essentially back where we started? IFRS is legal, except where it isn’t? Not so, says Melanie McLaren, executive director of codes and standards at the FRC. “Martin Moore has been very categoric in the areas Bompas said should be looked at and reviewed. D-BIS has also looked [at the Bompas opinion] and reached the conclusion that the accounting framework, including IFRS that require the use of fair value, is an entirely legal construct. Therefore we shouldn’t be seeking to say that there has been illegal action in following accounting standards.” 

“Company directors must override IFRS if they don’t think that following the standards gives a true and fair view", concurs McLaren. “Businesses evolve and transactions develop. You may face a circumstance that wasn’t contemplated by the standard and therefore you need to go back to first principles and say: what would present a true and fair view in this particular case?”

Gilly Lord, head of regulatory affairs at PwC, believes that overall the debate over the legality of IFRS has not been helpful. “I don’t think the problem was that the accounts [of banks] weren’t true and fair as defined by the accounting framework,” she says. “But the framework we had for accounting and corporate reporting didn’t work as well as it should. We need to think really carefully about how narrative reporting needs to improve and how companies and banks give investors a clear idea of their business model. Is it enough to look at historic financial performance? Are there other aspects of performance that are important? What about more future-looking information? If we look at those debates, we will achieve more than sniping about whether IFRS is legal or not.”

Full article

FRC-opinion

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