The Bruce Column — Moore is better

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03 Oct, 2013

A legal opinion from Michael Moore QC has cleared up many of the arguments surrounding IFRS. Robert Bruce, our regular resident columnist, reports on a welcome outbreak of clarity, thought, and reason.

For several months now legal wrangling over International Financial Reporting Standards has produced some meaty headlines. In one case there was a suggestion that IFRSs were somehow illegal. Some argued that investors were not getting the best of information if companies followed IFRS. It all seemed slightly bizarre given that IFRS are promulgated by the IASB, an independent body, but one which is overseen by, amongst others, IOSCO, the International Organisation of Securities Commissions, a body which exists to protect investors on a global basis.

Now a definitive legal opinion has been handed down from Martin Moore QC. And as a result the Department for Business has confirmed that on the specific point of the legality of IFRS all the concerns and worries expressed were ‘misconceived’.

So with that worry knocked on the head for good, (or at least for the time being), there are other areas of contention which the Moore Opinion addresses. One is the confusion which has been created by what he refers to as ‘the failure to require prudence as a fundamental accounting principle’.

He looks to the IASB’s Conceptual Framework.  ‘The Conceptual Framework’, he says, ‘has determined that there should be only two fundamental qualitative characteristics, described as relevance and faithful representation. The word prudence does not appear. Instead neutrality is given greater emphasis.’ 

He looks again at the wording of the Conceptual Framework:

A neutral depiction is without bias in the selection or presentation of financial information. A neutral depiction is not slanted, weighted, emphasised, de-emphasised or otherwise manipulated to increase the probability that financial information will be received favourably or unfavourably by users. Neutral information does not mean information with no purpose or no influence on behaviour. On the contrary, relevant financial information is, by definition, capable of making a difference in users’ decisions 

And then he makes the point that: 'To my mind the key message in that paragraph is the reference to the prevention of manipulation…The Conceptual Framework is emphatically not outlawing the application of common sense and caution in the judgments that inevitably need to be made in the production of financial statements'. 

To those who ask why the specific word prudence was left out of the Conceptual Framework’s wording he points out that simply: 'The IASB decided to remove the reference to the concept of prudence because it was thought that all too often it had become a cover for bias in the form of excessive conservatism'.  He sees a resonance with the Accounting Directive, which he sees as ‘an unequivocal reaffirmation of the caution principle but without bias which seems to me to be the essence of prudence…' 

He also downplays the importance of the use of the word prudence. ‘It is also, in my view, important to bear in mind that the word itself is not of overriding importance’, he says. 'Although “prudent” is used in domestic and European legislation, it is not totemic. “Prudence” is an abstract concept – like “true and fair” – and its content is capable of variation and evolution; its meaning will change and develop over time. What is important is the concept and behaviour that the language used is seeking to describe and mandate'. 

But his Opinion accepts that it would be useful, to avoid future argument, to actually put the word prudence into the Conceptual Framework, just to take away any doubt.  'I would add, however’, he says, ‘that in order to facilitate the adoption by the European Union of further standards developed in accordance with the Conceptual Framework, and given the concern apparently caused by the retirement of the word prudence, this debate could be avoided if the Conceptual Framework, when next published, were to confirm the importance and centrality of caution without bias, and expressly use the term 'prudence' when setting out the principles to be applied when matters to be reflected in the financial statements are uncertain'. 

Moore’s Opinion also knocks the old canard of there being no override available firmly on the head. IAS 1, paragraph 15 ‘[makes] it clear that more than slavish adherence to IFRS is required to achieve fair presentation’. He concludes succinctly: 'Where the express requirement of financial statements is, by paragraph 15 of IAS 1, to achieve fair presentation and the required explanation for departure from an IFRS is that departure was necessary in order to achieve fair presentation, there is simply no reasonable basis for denying the existence of a true and fair override'. 

This Opinion is timely and clear. Anyone with further doubts should sit down quietly and read it through. It only runs to 26 pages. It is short, sweet, and clearly expressed.

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