IFRS: Standards are legal, says BIS

28 Oct 2013

Accountants, auditors, lawmakers and companies in the UK can breathe a sigh of relief after government officials declared IFRS to be compatible with UK and EU law. This follows a legal opinion that questioned the legality of some company accounts where EU law allegedly clashed with IFRS.

In a statement on 3 October, consumer affairs and employment relations minister Jo Swinson said that expressions of concern over IFRS were “misconceived” and that the existing legal framework, including IFRS, “is binding under European law”.

The Financial Reporting Council and the Department for Business Innovation & Skills sought independent legal advice and separately concurred that the ‘true and fair view’ requirement takes precedence where compliance with the IFRS protocol would produce misleading accounts.

The question of illegality was raised earlier this year, by a group of investors and gathered speed following exposure in the national media. The investors commissioned a legal opinion from George Bompas QC, which was submitted in evidence to the Parliamentary Commission on Banking Standards.The investors’ opinion, which secured a pledge from the European Commission to investigate its concerns, alleged that in rare cases, the ‘true and fair view’ mandated in EU Company Law clashed with some of the International Financial Reporting Standards (in particular IAS 39) therefore rendering some company accounts illegal.

Mr Bompas argued that in most cases, compliance with IFRS would be sufficient to achieve the ‘true and fair view’ requirement, but that some distortions in the financial statements of banks meant that they were neither true nor fair, and therefore dividends had been paid out on the basis of incorrect and illegal figures.

Prudence: “dead or alive?”

Mr Bompas also argued that the removal of the concept of prudence’ from IFRS had rendered the standards legally flawed. Prudence was replaced by the concept of ‘neutrality’ in the 2010 revision of the first chapters of the Conceptual Framework.

IASB chairman Hans Hoogervorst has repeatedly argued that the spirit of prudence remains in the standards, covered by such concepts as fair value, neutrality and the exercise of caution. Mr. Hoogervorst defended the removal of the concept on the grounds that it was an obstacle to convergence and could encourage income smoothing and a systemic bias towards excessive conservatism. “The IASB felt a need to be completely unambiguous about this issue” he said. The IASB is however now re-examining its Conceptual Framework.

“On the specific issue of legality, the concerns expressed by some are misconceived.”
- Baroness Hogg, Chairman, FRC

The Financial Reporting Council’s chairman, Baroness Hogg, concluded “On the specific issue of legality…the concerns expressed by some are misconceived”.

But she added, “there is scope for improvements” in the standards including the revival of the stewardship debate, and perhaps controversially, the explicit acknowledgement of the concept of prudence in the Conceptual Framework.

Now that the FRC has got its latest legal opinion from Martin Moore QC and the government is satisfied that the concerns are misplaced, this debate on legality is expected to draw to a close.

The debate now is expected to focus on changes that might be needed to make the standards work well.