As we enter the reporting season for 2019 year-ends, we consider the implications of Brexit for financial statements and highlight good financial reporting practice for now and the future.
2019 year-end accounts
Regulation for company accounts
On the basis that the UK has not left the EU by 31 December 2019, UK entities will either be applying UK GAAP or EU-adopted IFRS in their upcoming annual financial statements.
UK entities will still be entitled to the exemptions afforded to EU member states, for example the exemption available to a parent entity from the preparation of group accounts where the parent entity is included by way of consolidation in the accounts of a larger group within the European Economic Area (EEA). More information on the current regulatory regime can be found in the faculty’s factsheet UK Regulation for Company Accounts.
Reporting on the uncertain
A much greater issue is how entities reflect in their annual accounts the continued uncertainty. The guidance produced for the 2018 accounts remains relevant for 2019 (see Brexit’s effect on the preparation of the 2018 financial statements in the January 2019 issue of By All Accounts), although it may be that expectations of good quality reporting are higher as preparers are able to benefit from the experience of the previous year.
The degree to which judgements and estimation uncertainty will impact the recognition and measurement of assets and liabilities as a result of Brexit will vary from business to business. Entities will need to consider the impact of possible Brexit scenarios (from no-deal to different forms of arrangements with the EU) on, for example, going concern, impairment reviews, items held at fair value and tax. As important as the numbers are the disclosures required by FRS 102 and IFRS about judgements and estimates made when preparing the accounts.
In its open letter to Audit Committee Chairs and Finance Directors (October 2019), the Financial Reporting Council notes that in times of uncertainty investors look for greater transparency in corporate reports. It expects companies to consider carefully the detail provided in annual reports and accounts on those areas that are exposed to heightened levels of risk. In previous years it has highlighted the importance of explanations by management of actions taken to identify and mitigate risks posed by Brexit to the business.
What does the future hold?
Changes to UK company law come into effect if, or when, the UK is no longer an EU member state, with the exact changes depending on whether the UK leaves with or without a deal. In the event of a Brexit ‘with a deal’, the changes would generally come into effect at the end of a transition period. From a financial reporting perspective, the key issues are likely to revolve around exemptions available for EU-member states which may no longer be available once the UK leaves the EU.
UK GAAP accounting standards are not expected to change as a result of Brexit other than to reflect changes in company law. ‘UK adopted international accounting standards’ will replace EU-adopted IFRS for UK entities for accounting periods beginning after the date the UK leaves the EU. At the date of exit these two sets of standards will be identical. Further amendments to IFRS issued by the IASB (including any amendments not yet endorsed for use in Europe) will be subject to a UK endorsement process.
Resources
A range of resources to help prepare for Brexit, including the financial reporting implications, can be found at icaew.com/brexit.
The Financial Reporting Faculty will keep the need for further guidance under review and we welcome your views and suggestions.
About the author
Marianne Mau is technical lead in the Financial Reporting Faculty.
