The latest letter, to the chairmen of the FTSE 350 companies, is based on information uncovered under a freedom of information (FOI) request, which the LAPFF argues, undermines FRC claims that its interpretation of the law on true and fair is backed by government.
“LAPFF believes that the FRC has been doing its job badly because it’s been reading the law wrongly,” LAPFF chair Kieran Quinn said.
“What matters to investors is that companies do the right thing. We have today rewritten to FTSE 350 companies advising them to disregard the FRC on this matter so that they comply with the law with no risk of illegal outcomes.”
As the LAPFF explains in the letter, in August last year, company law expert George Bompas QC issued a further opinion reiterating his belief that “unless the accounts enable a determination of the distributable profits from the numbers stated in the accounts then the accounts will not give a true and fair view of the assets, liabilities, financial position and profit or loss”.
This is of crucial importance because, the forum warns, if the accounts don’t give a true and fair view of them, any distribution is unlawful, even if the distributable profits existed at the time the distribution was made.
It means that directors could be liable if a company later becomes insolvent or has an unfunded pension fund deficit, after periods in which unlawful distributions were made
The FRC, meanwhile, argues that the presentation of a true and fair view remains a fundamental requirement of financial reporting, and that in the vast majority of cases, a true and fair view will be achieved by compliance with accounting standards and additional disclosure to explain an issue fully.
However, in those rare cases where compliance with an accounting standard would result in accounts being “so misleading” that they would conflict with the objectives of financial statements, it says, then the standard should be overridden.
Bompas pointed out that the FRC’s position requires two sets of books – which is not permitted by the law – because complying with standards could result in “accounts conflating realised profits with unrealised gains, or leaving losses out altogether, with the result that amounts available for distribution cannot be determined from the numbers in the accounts”.
On the basis of the advice, LAPFF wrote to the chairs of the FTSE 350 in November 2015 warning them to disregard the FRC’s view.
In response, as the FOI request reveals, the FRC forwarded a draft press statement to the Department of Business, Innovation and Skills, which said, “The FRC and the government have confirmed that the views of LAPFF on this matter are incorrect and may be disregarded”.
BIS refused to agree the wording and, after a second attempt by the FRC, rewrote the text itself, as LAPFF points out, “excising all reference to LAPFF being incorrect”.
“All that BIS would permit is a position that does not rebut LAPFF or Mr Bompas,” it adds.
It goes on to accuse the regulator of changing the subject in order to avoid addressing the key issue in question. And it urges the companies to pass on its letter to their lawyers as a matter of urgency.
“Following the advice of Mr Bompas carries no risk of illegality,” it concludes.
“It is a safe option, whereas following the position of the FRC carries a significant risk that your accounts will be defective, thus putting your board in a position of approving unlawful distributions, and potentially trading while insolvent while presenting accounts that show a healthy financial position.”
The FRC has rejected the LAPFF’s latest accusations saying that it discusses policy issues on a regular basis with central government as the FOI response shows.
“Our position on this issue is clear: the Companies Act 2006 does not require the separate disclosure of a figure for distributable profits. Ultimately interpretation of the Act is a matter for the courts.
“The FRC stands by what it has previously said on this matter. It was aware that the LAPFF had written to company chairmen in late 2015. Their letter dealt with a very narrow point of company law in terms which we cannot support and which raises uncertainty unnecessarily.
“The LAPFF’s new letter is drawing on emails regarding a draft statement. The final version of the statement was agreed with BIS.”
The forum is a collaborative shareholder engagement group of 71 local government pension scheme funds from across the country with combined assets of over £175bn.