Robert Peston has picked up on his blog the argument made by chartered accountant Tin Bush that International Financial Reporting Standards are illegal when applied to banks because as Bush argues and Peston notes:
In simple terms, what went wrong - Bush says - is that in the UK and Ireland from 2005 onwards banks stopped making any general provisions against the risk that their loans could go bad. In that sense, they stopped the long and tested practice of factoring into the cost of a loan the probability that it might not be repaid.
British and Irish banks stopped making these provisions for possible non-repayment of loans at both the level of published accounts and at the lower level of the operating units.
This was not their choice, Bush says. They were forced to do it by the way that the Accounting Standards Board implemented the international accounting standard IAS 39 as Financial Reporting Standard 26, or FRS 26.
Bush argues that the implementation of FRS26 magically made lending seem less risky and cheaper for British banks - so (guess what?) they did much more of it.
Peston’s not quite convinced, but adds:
Here's what gets Mr Bush really excited.
He thinks that FRS 26 may actually contravene the requirement of company law that banks operate in a prudent manner consistent with the protection of their depositors and creditors.
Which carries the intriguing and resonant implication that shareholders might be able to claim that they were gulled by FRS26 into believing that Britain's banks were made of bricks when they were in fact made of sand.
And that was true.
As much as it was for Ireland.
And as we were just about alone in adopting IFRS in this form why it it that we had such spectacular failures if not, at last in part, for this reason?
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Gosh – this is quite an eccentric argument. Company law mandates adoption of FRS 26 for (eg) listed companies. It is therefore nonsensical to argue that adoption of FRS 26 is unlawful.
It is quite possible for something to be ill-thought through and negligent without being illegal.
@Marc Daniels
Not at all – and this is an area where an accountant will know more than a lawyer
IFRS are given legal power without being referred to in detail – i.e. as secondary legislation
But it has to be assumed that they accord with primary legislation s830 – s837 CA 2005 in this case
But they don’t. primary legislation makes clear preservation of capital is a key accounting concept – and violation results in a true and fair view not being shown
IFRS contravenes that requirement. Ergo, they are defective.
That’s not bizarre.
That’s reality
I haven’t read FRS26, but the summary above suggests a nonsensical argument. It’s a reporting requirement. If your reports, compiled on a certain basis, suggest that it’s safe to lend more, but it isn’t actually safe to lend more, then don’t lend more. The overriding requirement is to act prudently, not to base your entire business on artificial reporting methods.
This shows FRS26 to be flawed, not unlawful
The question of what happens when one piece of legislation is incompatible with another is a legal question. The answer is that the courts will strain to find the two compatible and, if they cannot, the latter will prevail – the doctrine of implied repeal. The fact that IFRS is not itself set out in the statute is irrelevant.
Your argument is similar to that of the so-called “Metric Martyrs”, who tried to argue that 1994 Regulations requiring the use of metric measurements were incompatible with the 1985 Weights and Measures Act and hence unlawful. They lost, for the same reason you are wrong – the doctrine of implied repeal, which has been settled constitutional law for several hundred years.
I should add that in this case, unlike the Metric Martyrs, it would not take much straining for a Court to find IFRS and Companies Act principles compatible, so no implied repeal would be necessary.
I should also add that I contribute on this blog to be constructive and share knowledge and expertise. I am not trying to pick a fight, and it would be help your case if you were more open to fair criticism and less confrontational.
@Marc Daniels
It’s entirely up to you if you comment, or not.
I happen to think your attitude not very helpful on occasion. If that shows, so be it. It reflects my long experience of lawyers, who usually lack common sense. I’m hardly the first ton say so.
You have lacked it in your response. The issue will never go to court – so your remedy and expertise is irrelevant, and your comment likewise, I’m afraid to say.
The issue will be resolved by the government telling the IASB to get its act together, here and in Europe
And it will be resolved by the IASB not wanting to look like they do not know what they are doing – which is damaging for them, and is I think true
Appreciation of the reality of negotiation, politics and bringing pressure to bear without recourse to litigation is key to the way I work
I am entirely open to criticism and when I am wrong I will note it and learn from it – but when I am being criticised for things I think tangential at best, irrelevant at worst, I might show my indifference to the attack
I am interested in real change – and it doesn’t come through litigation, or pedantry
And I happen to think Tim Bush has discovered an issue of real substance – and that’s why I have highlighted it. Argue with the substance of why he is wrong by all means – but not how he can be ignored – because that is all you have managed to do so far
The substance of what Bush argues is wrong for the reasons Daniels outlines.
Once again, you show yourself to be completely out of your depth.
This comment has been deleted. It failed the moderation policy noted here. http://www.taxresearch.org.uk/Blog/comments/. The editor’s decision on this matter is final.
@Tom Howe
That’s why Tim Bush is on the UK Accounting Standard’s Boards Urgent Issues Task Force is it – because he doesn’t know what he’s talking about?
You have no clue whether Marc s right or wrong
You’re just here to make crass comments – which is why you won’t be any more. You have persistently revealed your anarchist tendency and I do not tolerate such commentary and will be deleting your observations in future
That is really unimpressive. Goodbye.
I don’t think Marc’s quite got it either. The point is that it is possible to comply with FRS 26 in reports, and to comply with the companies legislation by applying prudence. There is no inconsistency between the two for legal purposes.
@Marc Daniels
Delighted to see you go
When the best you could say I was “silly” you clearly failed to add value – and I was entitled to delete your comment as being of no value to debate
Candidly – you claimed to be seeking to add value – and didn’t. You were pedantic and dismissive of one of the best brains in British accountancy – Tim Bush that is – who is backed in his opinion by a number of professors, and yes, me. He also persuaded Peston, at least in part of the merit of the argument – so he’s no fool
But you could not see that
And candidly I have no time for pedants here – or anywhere else – who wish to find nitpicking objections to maintaining a rotten status quo
And that, candidly, is what you were doing. And that added no value at all
This comment has been deleted. It failed the moderation policy noted here. http://www.taxresearch.org.uk/Blog/comments/. The editor’s decision on this matter is final.