Brexit takes a back seat, for now
Marianne Mau looks ahead to a post-Brexit financial reporting landscape.Over the past few years Brexit has dominated news in the UK. But in recent months it has been sidelined by the COVID-19 pandemic. Brexit will be back, however, as the current transition period comes to an end on 31 December 2020.
In this article we reflect on what we know, what still needs to be finalised and what we expect the financial reporting landscape to look like on 1 January 2021.
The transition period
Although the UK formally left the EU on 31 January 2020, it continues to be subject to EU rules until the end of the transition period, referred to as the implementation period (IP) in legislation. UK companies will continue to apply either EU-adopted IFRS or UK GAAP in their accounts. Exemptions that are dependent on EU status will continue to apply, for example, an intermediate parent company can continue to take advantage of the exemption from preparing group accounts (Companies Act 2006 s400) for the time being. Whether these exemptions will continue to be available after the end of the transition period will depend on decisions about accounting equivalence by the UK and the remaining EU 27. The target date for completing these assessments is June 2020.
UK GAAP Accounts post-Brexit
The Financial Reporting Council will make consequential amendments to UK accounting standards necessary to reflect the changes in company law that come into effect at the end of the transition period.
IFRS Accounts post-Brexit
UK companies with accounting periods beginning on or after 1 January 2021 will switch from applying IFRS as adopted by the EU to IFRS as adopted by the UK.
There will be a choice for some companies with earlier accounting periods to apply either EU-adopted IFRS or UK-adopted IFRS. This choice is available for accounting periods:
- beginning before, but ending on or after, IP completion day; or
- ending before the IP completion day, when IP completion day occurs before the end of the period for filing the accounts.
What will UK-adopted IFRS look like?
Current legislation provides that all IFRS that have been endorsed by the EU become UK-adopted IFRS when the transition period comes to an end, ie, as at 31 December 2020 UK, and EU-adopted IFRS will be identical.
The Secretary of State will have the power to endorse new or amended standards for use in the UK, and to delegate this responsibility to a body. The UK Endorsement Board is currently being established and is likely to be operational later this year once the appropriate infrastructure, Chair and staff are in place.
After the end of the IP therefore, the UK and EU will be making IFRS adoption decisions independently of each other.
IFRS 17 Insurance Contracts has not yet been endorsed by the EU and it is unlikely that it will be by 31 December 2020. There are several narrow-scope amendments to IFRS that have not yet been endorsed and a number of further amendments to be issued by the IASB before the end of the year.
If the UK takes a different view on the endorsement of a standard or amendment, or concludes the process at a different time, it may be that UK and EU-endorsed IFRS diverge.
As well as the FRC’s website containing information on UK-endorsement, more information on EU endorsement status is available on the EFRAG website and on expected IFRS amendments at ifrs.org
Principal risks and uncertainties
At this time it’s hard to imagine risks and uncertainties more significant than COVID-19. Nonetheless, Brexit remains a risk for some and for those entities finalising their accounts, it may still be appropriate to consider the impact of possible Brexit scenarios (from no deal to different forms of arrangements with the EU) on measurement and disclosure.
About the author
Marianne Mau, Technical Lead, Financial Reporting Faculty