Further supplementary memorandum by Mr
Timothy Bush (ADT 18)
THE CLASH OF OBJECTIVES IFRS VERSUS COMPANY
LAW, AND PROBLEMS IN IMPLEMENTATION OF THE LAW
THE "TRUE
AND FAIR"
PROBLEM—LIMITATION
OF SCOPE
WITH IFRS
1. DTI (now BIS) advice was that notwithstanding
IFRS, UK statutory accounts should still discharge solvency obligations.
2. However, the IFRS enabling law (DTI 2004
for 2005 commencement) was drafted "true and fair (fairly
presents) in accordance" with IFRS. IFRS defines "fairly
presents" as following IFRS standards (or where not a standard,
what is in "the Framework") the problem is that the
Framework is in its objects is excluding things needed for discharge
of solvency obligations. IAS 39 in particular is at odds with
solvency discharge.
3. There was a problem of structure; of
law frustrating law, and standards themselves entirely at odds
with the law and in cases directionally wrong (eg leaving out
losses).
4. To solve the law problem, investors'
lawyers came up with an opinion questioning the form in which
IFRS had been incorporated in UK law. This led to revisions in
the Companies Act 2006, but these were only operative from April
2009. (See Hansard debate below).
5. However, even with the law adjusted to
allow overriding IFRS, beyond the limited terms IFRS itself allows,
there are no accounting standards to deliver the law. Some IFRS
are directionally at odds with discharge of solvency obligations.
Further, the FSA had used UK GAAP as the basis for prudential
returns, and substituted IFRS in its place. (See ICAEW Audit Quality
Forum below on the mismatch).
HANSARD—DEBATE
OF THE
COMPANY LAW
BILL 2006
Hansard 13 July 2006, there further probing
amendments to extract whether the new true and fair view clauses
were enough, but it clearly describes concerns with a "tick
box" regime.
Justine Greening (Putney)
These probing amendments seek clarification
of the concept of "true and fair". One thing the Bill
does is move the auditing profession increasingly to a tick-box
approach to auditing whereby, if accounting and auditing standards
are fulfilled, the accounts and the business of the audit, as
well as the accountants, are, by definition, deemed to be successful.
I understand that, nevertheless, the concept of "true and
fair" still underpins financial statements.
We are moving increasingly to an IAS basis
for international companies, and IAS 1 includes the concept of
fair presentation, which is not exactly the same, potentially,
as "true and fair". I understand that when this has
been debated at European Union level, "true and fair"
has predominated over even "fair presentation". Again,
it would be helpful to get clarification from the Minister that,
irrespective of the fact that all accounting and auditing standards
might have been followed, the accounts that emerge from that process
must give a true and fair view of the financial position of the
company at the date of those accounts. That must predominate,
and I would be grateful if she gave the Committee that assurance.
ICAEW—Audit Purpose, Audit Quality Forum
(March 2006), recognises that accounting standards headed in different
direction to the law http://www.icaew.com/~/media/Files/Technical/Audit-and-assurance/audit-quality/audit-quality-forum/meeting-notes-2006/july-2006-audit-purpose.ashx
"The purpose of the statutory audit,
as set out in law, reflects the stewardship role and is backed
up by case law."
"The group believes that further consideration
of the potential differences between International Financial Reporting
Standards as a reporting framework and the purpose of the audit
under the current UK legal framework (and future framework) by
an appropriate forum would be helpful in understanding these differences
and what the likely implications may be."
Solution (TB comment) In an era of "following
standards", it is absolutely hazardous to have a regime of
standards that absolutely frustrate the discharge of solvency
obligations and fiduciary obligations to the members and creditors.
There needs to be a statutory basis to put the basic Companies
Act Accounting Rules back into operation to allow law to function.
(Directors of large groups will not be getting reliable subsidiary
accounts either to show their directors' discharge).
2. OUTPUT STANDARD
Company law transparency (for members) and discharge
of solvency obligations
Extant in law, but, IFRS does not deliver to
that standard (directly clashes in places).
Also, FRS 26* (ASB copy copy of IAS 39) does
not deliver to that standard either, and it is inconsistent with
the Companies Act Accounting Rules it is inferior to in law (ie
it is replicating the clash that IFRS also has with the law).
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