The row centres on interpretation of the Companies Act 2006 in relation to dividend payments based on accounts prepared under International Financial Reporting Standards (IFRS).

The latest letter, signed by Kieran Quinn, LAPFF’s chair, states: ‘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 whilst insolvent whilst presenting accounts that show a healthy financial position.’

Under a Freedom of Information (FOI) request LAPFF has seen correspondence between the FRC and the government’s former business body, the Department of Business, Innovation and Skills (BIS), which it claims shows the government was not in agreement with the regulator on this issue, even though the FRC claimed it was.

The argument focuses on legal advice from George Bompas QC, which says accounts prepared under ‘defective’ IFRS mean companies risk paying dividends out of ‘illusory’ IFRS profits. LAPFF previously raised the issue with the FRC last year, but was told this was a ‘narrow point’ on which the advice it had received was incorrect.

In the letter, LAPFF says Bompas’s opinion is ‘very clear’ that unless the accounts enable a determination of the distributable profits from the numbers as 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.

According to this argument, the law does not permit or require ‘two sets of books’ to do this. However, LAPFF maintains that the FRC position does require ‘two sets of books’ because following financial reporting standards can lead to accounts conflating realised profits with unrealised gains, or leaving out losses altogether, with the result that amounts available for distribution cannot be determined from the numbers in the accounts.

The forum says this matters because if accounts do not give a true and fair view of the assets, liabilities, financial position and profit or loss, then any distribution will be unlawful, even if the distributable profits existed at the time the distribution was made. On the basis of Bompas’ opinion the FRC position creates a significant risk that following the FRC position will be contrary to the law, and could be particularly problematic for directors if a company later becomes insolvent, or has an unfunded pension fund deficit, after periods in which unlawful distributions were made.

The documents obtained under the FOI request include exchanges between BIS and the FRC regarding the earlier discussion on this issue. LAPFF says the correspondence shows that BIS did tell the FRC that it was wrong and BIS had to reject FRC assertions regarding LAPFF’s position in no uncertain terms. However, it claims the regulator went on to issue press information and guidance which was at variance with this.

The LAPFF is now advising FTSE 350 chairs to discuss the issues at board level and is urging them to take their own legal advice. It also claims that the documentation it has obtained illustrates ‘the general risk of the FRC being wrong and providing misleading guidance whenever BIS is not acting to correct it’.

Kieran Quinn, LAPFF chair, said: ‘LAPFF believes that the FRC has been doing its job badly because it’s been reading the law wrongly.

‘We were surprised by FRC claims that the government agreed that LAPFF and Mr Bompas was wrong. The FOI reveals that it didn’t. It’s time the FRC did its job properly by regulating in accordance with the law.’

For its part 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.

In a statement the regulator said: ‘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.’

LAPFF is a collaborative group of 71 local government pension scheme funds from across the country with combined assets of over £175bn.

LAPFF’s letter to FTSE 350 chairs is here.