2020/21 Reporting Season: Brexit – key financial reporting considerations for the year end
15 December 2020: As the countdown to Brexit continues, ICAEW’s Financial Reporting Faculty’s short guide looks at the main areas of focus for the year end and beyond.
As part of its ongoing response to the UK's decision to leave the EU, ICAEW has produced a report which addresses some of the key financial reporting issues the UK will face.
The significance of the impact should correlate with the level of detail of the disclosures provided. Even if the impact is minimal, it is still useful for management to convey their conclusions and the basis of their assessment.
One of the key places where the impact of Brexit will be disclosed will be the strategic report (unless the company is ‘small’). The report should include, among other information, a fair review of the company’s business, principal risks and uncertainties and factors likely to affect future development, performance and position.
Whether the implications of Brexit on financial reporting are minimal or significant will, inter-alia, depend upon the nature of a company’s business activities and operations: each company will be impacted differently as a result of Brexit.
Many accounting areas require management to apply judgments and estimations when determining the carrying amounts of assets and liabilities to be reported in the financial statements. As well as mandatory impairment testing, there are also likely to be more indicators of impairment arising at the current time. Assumptions underpinning recoverability of the value of assets such as goodwill, intangibles and property, plant and equipment will have to be carefully considered given the potential ‘double hit’ of COVID-19 and Brexit uncertainty.
Other areas requiring careful consideration include financial instruments, inventory, deferred tax assets, foreign exchange rate volatility and onerous contracts.
Disclosures in the notes, as well as narrative reports, will need attention. One of the key areas where Brexit may impact is disclosures of significant estimates and judgments, including sensitivities of key estimates. This should be a real area of focus for the year-end. And, last but not least, there may be uncertainty around the ability of the reporting entity to continue as a going concern. Material uncertainties may require disclosure and management may need to be prepared for the possibility of a ‘modified audit report’.
After the end of the transition period, the UK’s legal framework for accounting and corporate reporting will operate independently from EU law, but these changes mainly come into effect for accounting periods beginning on or after 1 January 2021.
These issues and more are considered in greater depth in new guidance from ICAEW’s Financial Reporting Faculty: Brexit – implications for financial reporting.
Further ICAEW support on the end of the transition period is available at icaew.com/Brexit.