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Brexit’s effect on the preparation of 2018 financial statements

Mary Holden considers how Brexit might affect the preparation of 2018 financial statements.

Brexit continues to dominate the headlines. The challenges to business arising from theBrexit ongoing uncertainty as to our future relationship with the EU are often mentioned. The UK government is considering the impact on accounting and auditing following Brexit. The Department for Business, Energy & Industrial Strategy recently issued guidance on the implications for both in the event that we leave the EU with no deal.

However, one challenge that is often overlooked is the need for companies to prepare and publish their 2018 annual report and accounts while negotiations continue. This article looks at some of the factors to consider.

Principal risks and uncertainties

Companies are required to report on the principal risks and uncertainties that they face within their strategic report. To date, it has typically been here where companies have made reference to Brexit.

The government is advising businesses to plan for a no deal scenario, and it is this planning that will inform the disclosures the board is able to make around the risks arising from Brexit and the strategies they have in place to manage those risks. While the focus is often on the risks and challenges, the board may have also identified opportunities, which can be discussed too. Good disclosure in the strategic report will enable the board to assure stakeholders that they are planning for Brexit and managing the risks to the business, while also being well placed to take up any opportunities.

Going concern and impairment

In terms of the accounts themselves, two key areas that may be affected are the assessment of going concern and impairment testing. Both of these areas require management to make assumptions about the future, which is inherently more challenging to do in an uncertain environment. Again, the planning for a no-deal scenario will be a good place to start.

For example, if Brexit planning suggests a need to build up inventories in order to minimise disruption to production lines in the event of no deal, or to ramp up production in order to be able to ship more goods to distributors overseas before Brexit happens, there will be a knock-on effect to the cash needs of the business. In considering the going concern assessment, management would then need to determine whether the business can withstand this additional pressure on cash flows within its current facilities. Where the going concern assessment relies on being able to refinance, the availability and cost of finance would also need to be considered.

Impairment testing requires management to look even further into the future, using budgets and forecasts, and extrapolating into subsequent years. As well as making the preparation of budgets and forecasts more challenging, the risks arising from Brexit may affect the discount rate used in the present value calculation, which should reflect current market assessments of the time value of money. It may also affect the growth rate used to extrapolate beyond the period covered by budgets and forecasts.

Other areas

Other areas of financial reporting where the uncertainty around Brexit may have an affect include the assessment of whether long-term contracts are loss-making and should be provided for, and whether deferred tax assets are recoverable (if dependant on the availability of sufficient future taxable profits). There may well be further areas, depending on the specific circumstances of the entity. For example, where planning for Brexit indicates a potential need to restructure the business under some scenarios, a provision for such restructuring should only be recognised if management is sufficiently committed to the restructuring by the reporting date.

In summary, businesses are being encouraged to plan for a range of Brexit scenarios and the insights gained from this planning should flow through into the next annual report and set of accounts.

About the author

Mary Holden is an associate director at Grant Thornton.