True and Fair View Revisited – A Reply to Alexander and Nobes

Abstract

This paper is a response to the critical comments of Alexander (2006) and Nobes (2006) on our article on revenue recognition, which was published last year in this journal (Wüstemann and Kierzek, 2005). While Alexander primarily objects to our statement that there is a ‘requirement of legal certainty in the European Union’, Nobes challenges our interpretation of the true and fair view principle and its role in the endorsement and application of International Financial Reporting Standards (IFRS) in the EU. We rebut Alexander's objections by providing references, which evidence that the principle of legal certainty represents a fundamental concept of Community law. We refute Nobes' counterarguments by inferring from the objective of the IAS Regulation and the purpose of the endorsement mechanism that a common meaning of the true and fair view principle must exist in the EU, that IFRS should only become applicable in the EU if they are not contrary to this ‘European’ true and fair view principle and that the true and fair view principle should also be considered in the application of IFRS in the EU, particularly in the choice of accounting policies for unregulated issues.

Acknowledgements

The authors want to express their gratitude for helpful comments on earlier drafts from the editor of this journal, Peter Walton, and from an anonymous referee.

Notes

¹Legal certainty is a fundamental principle of German constitutional law and also a fundamental principle of German tax law. Since the determination of income taxes is governed by German accounting principles (‘Maßgeblichkeitsprinzip’ – principle of the authoritativeness of accounting for tax purposes), it is undisputed and undisputable that German accounting principles need to and actually do conform to the principle of legal certainty. See Weber-Grellet (1996) and Fresl (2000), for example, for details and further references.

²In the following the directives will be referred to as the ‘Fourth (Company Law) Directive’ and the ‘Seventh (Company Law) Directive’ or the ‘accounting directives’.

³The Lisbon European Council decided in 2000 that the International Market for Financial Services should be completed by 2005. See Presidency Conclusions from the Lisbon European Council, 23 and 24 March 2000.

⁴Judgement of the European Court of Justice of 6 October 1982, Case C–283/81, European Court reports 1982, p. 3415, here para. 19.

⁵See for details in the field of European tax law, Schön (1993).

⁶See for details Brown and Tarca (2005), and Dao (2005).

⁷See http://ec.europa.eu/internal_market/accounting/docs/ias/roundtable/060220_roundtable_en.pdf (accessed 18 July 2006) for details.

⁸See Canor (1998) for the necessity of internal coherence between norms in Community law.

⁹See van Hulle (2004) for a detailed discussion of the endorsement criteria.

¹⁰Judgement of the European Court of Justice of 27 June 1996, Case C–234/94, European Court reports 1996, p. I-3133, here para. 18.

¹¹Judgement of the European Court of Justice of 27 June 1996, Case C–234/94, European Court reports 1996, p. I-3133, here paras. 24 and 25.

¹²The Court has stated that ‘Article 177 is essential for the preservation of the Community character of law established by the Treaty and has the object of ensuring that in all circumstances this law is the same in all States of the Community’. Judgement of the European Court of Justice of 16 January 1975, Case C–166/73, European Court reports 1974, p. 33, here para. 2.

¹³Judgement of the European Court of Justice of 20 May 1976, Case C–111/75, European Court reports 1976, p. 657, here paras. 10 and 11.

¹⁴See for a detailed discussion Schulze-Osterloh (1995), de Weerth (1996), Herzig (1996), Küting (1996), Back (1999), Hennrichs (1999) and Fresl (2000).

¹⁵According to the Contact Committee the true and fair override ‘must be applied in relation to a given company and not in relation to all companies or a category of companies’ (Van Hulle, 1993, p. 87) Ordelheide (1993, p. 102) argues in the same sense that ‘there is no possibility for a norm to be an exceptional case’. Van Hulle (1993, 1997) agrees with this position. Alexander (1996) and Alexander and Archer (2003a) disagree.

¹⁶Nobes refers to Arden (1993) in this context.

¹⁷See Zitzelsberger (1998) and Schön (2000) for a detailed criticism of the dynamic interpretation.

¹⁸See Rasmussen (1986) for a discussion of the ‘law-making effect’ of the European Court of Justice's rulings.

¹⁹For example, Judgement of the European Court of Justice of 9 July 1981, Case C–169/80, European Court reports 1981, p. 1931, here para. 17; Judgement of the European Court of Justice of 20 November 1997, Case C–338/95, European Court reports 1997, p. I-6495, here para. 19.

²⁰See, for example, Judgement of the European Court of Justice of 14 July 1977, Joint Cases C–9 and C–10/77, European Court reports 1977, p. 1517; Judgement of the European Court of Justice of 9 July 1981, Case C–169/80, European Court reports 1981, p. 1931; Judgement of the European Court of Justice of 21 September 1983, Case C–215/82, European Court reports 1983, p. 2633; Judgement of the European Court of Justice of 22 February 1989, Case C–92 and 93/87, European Court reports 1989, p. 405; Judgement of the European Court of Justice of 20 November 1997, Case C–338/95, European Court reports 1997, p. I-6495; Judgement of the European Court of Justice of 3 December 1998, Case C–381/97, European Court reports 1998, p. I-8153.

²¹Rasmussen (1986) (all quotations); see also Schweitzer and Hummer (1996), and Bleckmann (1997).

²²See Judgement of the European Court of Justice of 2 March 1999, Case C–179/97, European Court reports 1999, p. I-1251.

²³See Judgement of the European Court of Justice of 27 June 1996, Case C–234/94, European Court reports 1996, p. I-3133.

²⁴See Back (1999) for a discussion of the jurisprudence relating to dividend recognition in Germany.

²⁵Some Member States have exerted the option in Art. 4b IAS Regulation and, accordingly, permit or require certain companies to apply IFRS in the individual accounts. See for an overview http://ec.europa.eu/internal_market/accounting/docs/ias/ias-use-of-options_en.pdf (accessed 5 July 2006).

²⁶See Engel-Ciric (2005) for counterarguments.

²⁷Knepper and Bailey (2002) § 2.01–2.14.

²⁸‘Man wird davon ausgehen können, dass […] [Endorsement-Kriterien] nicht nur von der Kommission bei der “Übernahme” eines Standards geprüft werden müssen, sondern auch konsequent bei der späteren Auslegung eines Standards heranzuziehen sind. Sind bei der Interpretation der IAS zwei Alternativen im Streit, so müssen die zuständigen Gerichte entscheiden, welche der Alternativen den in Art. 3 Abs. 2 IAS-VO niedergelegten Grundsätzen entspricht. Lassen sich beide Interpretationen mit diesen Generalprinzipien vereinbaren, wird man prüfen müssen, welche Auslegung “näher” an den Zielen des Art. 3 Abs. 2 IAS-VO liegt. Die Entscheidung über den einzelnen Fall muss dann “deduktiv” aus der Anwendung der wesentlichen Leitprinzipien in Art. 3 Abs. 2 IAS-VO entwickelt werden. Lediglich soweit eine Präferenz für eine Lösung aus Art. 3 Abs. 2 IAS-VO nicht hergeleitet werden kann und auch IAS […] [8.10–8.12] keine Hilfe bieten, kann den betroffenen Unternehmen ein Gestaltungsspielraum zugestanden werden.’

²⁹The example is based on EITF 00 − 21. Example 2 – Can Manufacturing Equipment.

³⁰See EITF 00 − 21. Example 2 – Can Manufacturing Equipment.

³¹The fair values of equipment Y and Z can be measured reliably. They equal the prices at which other vendors sell the equipment on a stand-alone basis.

³²The amount of revenue may, however, be different under IAS 11 and FRS 5.

³³The inductive approach is best illustrated when Alexander refers to the financial statements of Deutsche Telekom in order to justify his proposition that German accounting principles are devoid of legal certainty (p. 73 et seq).