It has issued a statement which reconfirms that the presentation of a true and fair view remains a fundamental requirement of financial reporting.
In the vast majority of cases, the regulator says, a true and fair view will be achieved by compliance with accounting standards and by additional disclosure to explain an issue fully. “However, where compliance with an accounting standard would result in accounts being so misleading that they would conflict with the objectives of financial statements, the standard should be overridden."
It adds that it will continue to discharge its responsibilities in relation to the monitoring and enforcement of reporting on that basis.
Last year, a major group of investors, including the Universities’ Superannuation Scheme, Threadneedle Asset Management, UK Shareholders Association and the Local Authority Pension Fund Forum, sought legal advice from leading QC George Bompas because they felt that some IFRS were so flawed, they distorted the financial statements of banks from 2005 onwards.
As a result, the financial statements no longer showed a true and fair view – an accounting concept which is enshrined in UK law – and the dividends that the banks had been paying out on the basis of incorrect figures were illegal.
Bompas concluded that since the true and fair view is paramount, company directors have a duty to override IFRS to comply with it.
He argued that IFRS failed to include the capital maintenance purpose of accounts or to require prudence as a fundamental accounting principle. Furthermore, individual standards fail to follow statutory accounting principles.
He singled out IAS 39 for criticism for allowing unrealised mark to market “profits” and mark to model “profits” in valuations, “contrary to the requirement of prudence to include only realised profits” in the accounting directives.
He also slated IAS 39 for “not accounting for all foreseeable liabilities and likely losses irrespective of the time in which they arise”, again contrary to the prudence principle.
In response, the FRC went back to Martin Moore QC who had originally advised on the true and fair view in the light of implementation of the 2006 Companies Act. He confirmed that the overriding objective in preparing financial statements was achieving a true and fair view and that the override could only be used in the rarest of circumstances. Compliance with IFRS is legal.
His view concurred with that of the Department for Business, Innovation and Skills which described the investors’ concerns as “misconceived”.
As well as reconfirming the FRC’s approach to true and fair, the new statement also reflects the recent changes to UK GAAP and EU audit legislation.