This Know-How has been created by the Financial Reporting Faculty
Although the UK formally left the EU on 31 January 2020, it continued to be subject to EU rules until the end of the transition period – referred to as the implementation period (IP) completion day in the European Union (Withdrawal Agreement) Act 2020 and defined as 11.00 pm on 31 December 2020 (GMT).
The end of the transition period brings into effect changes in company law. Most of the substantive changes to company law requirements relevant to financial reporting are applicable for financial years beginning on or after 1 January 2021. Where this is not the case, this is noted below.
UK companies that are required or choose to apply international accounting standards (otherwise referred to as International Financial Reporting Standards or IFRS) will be required to switch from applying IFRS as adopted by the EU to IFRS as adopted by the UK. UK legislation provided that all IFRSs that had been endorsed by the EU on or before the IP completion day became UK-adopted IFRS. After 31 December 2020, any new or amended IFRSs will require independent endorsement in the UK to be part of the suite of UK-adopted IFRS that can be applied by UK companies.
The Secretary of State has the power to endorse new or amended standards for use in the UK, and to delegate this responsibility to the UK Endorsement Board. This delegation of authority has now been enacted through the International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021.
Disclosure of basis of preparation
Companies must disclose the basis on which their accounts have been prepared.
Where accounts are prepared for financial years beginning before 1 January 2021 but straddle IP completion day, or IP completion day occurs before the end of the period for filing the accounts:
- Generally, if a company is preparing accounts based on IFRS, the accounts should state that they are prepared “in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006”.
- In addition, if a company has transferable securities admitted to trading on a UK regulated market, is required to produce consolidated accounts and is preparing accounts to satisfy DTR requirements, those accounts should additionally state that they are “prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union”.
For accounts prepared for financial years beginning on or after 1 January 2021 the accounts of all UK companies preparing IFRS accounts should be referenced as being prepared in accordance with UK-adopted international accounting standards.
More information is available in the FRC’s Guidance for companies preparing IAS accounts for accounting periods straddling IP completion day.
A UK company with a listing in the EU will need to comply with the requirements of that regulated market. Therefore, accounts will need to be prepared (and be described as being prepared) in accordance with EU-adopted IFRS or IFRS as issued by the IASB.
EU-adopted IFRS is considered equivalent to UK-adopted IFRS for the purposes of UK markets and the Companies Act 2006. However, the EU has not (as yet) determined whether UK-adopted IFRS is equivalent to EU-adopted IFRS.
Covenants, loan or other agreements may need to be reviewed for references to EU-adopted IFRS to ensure that any requirements continue to be adhered to or the agreements amended to refer to UK-adopted IFRS.
Definitions and exemptions
Another change in company law is where it previously referred to the EEA or an EU-regulated market, these references have been amended to refer to the UK only. Some of the key implications are outlined below.
The Companies Act exempts an intermediate parent company from the preparation of consolidated accounts in certain circumstances.
- CA 2006 s400 – previously a UK intermediate parent with an EEA parent would be exempt from the preparation of consolidated accounts (subject to certain additional conditions). The reference has now changed to a UK parent, meaning that a UK intermediate parent with an EEA parent will no longer be exempt under s400.
- CA 2006 s401 – as an alternative to s400, a UK intermediate parent with a non-UK parent is exempt from the preparation of consolidated accounts subject to certain conditions, including that the consolidated accounts of the non-UK parent are prepared under UK GAAP (or equivalent) or UK-adopted IFRS (or equivalent). As noted above, EU-adopted IFRS is considered equivalent to UK-adopted IFRS. However, if the parent has applied a national GAAP, for example French or German GAAP, in its consolidated accounts then there will need to be more careful consideration of whether the basis of preparation is equivalent in all material respects. FRS 100 Application Guidance 'The Interpretation of Equivalence' provides further guidance on the interpretation of equivalence.
- Overseas subsidiaries – when a UK parent has an EEA subsidiary that is also an intermediate parent, it may be that the EEA intermediate parent will no longer be exempt from the preparation of consolidated accounts because the UK is no longer an EEA member state. Whether the exemption is available will depend on the requirements in the local jurisdiction. For example, an Italian intermediate parent that is also a subsidiary of a UK parent would previously have been able to claim exemption from the preparation of consolidated accounts under a provision comparable to s400 as described above. As there is no provision comparable to s401 in Italy, exemption from preparing consolidated accounts may no longer be available for the Italian intermediate parent. However, some other EU member states have provisions equivalent to s401, for example Ireland and Germany, so exemption might be available for a German intermediate parent subject to the equivalence and other criteria being met. Further guidance available in the PWC Guide 'Are EU subsidiaries of UK parents still entitled to exemption from preparing consolidated financial statements?' (registration required).
Small (and medium-sized) companies – definition of ineligible group
A company cannot take advantage of the simplified requirements and exemptions available to ‘small’ companies if it is part of an ineligible group. Previously an ineligible group was one that included, inter alia, an EU-traded entity (an entity with shares traded on an EU-regulated market). The reference has now changed to a UK-traded entity, making the definition less restrictive.
A company that qualifies as medium-sized is not required to make a s172 statement. This exemption is also available to a company that would be entitled to the medium-sized companies regime save for being a member of an ineligible group. Therefore, the change in definition (as described above) may mean more companies being able to take advantage of this exemption.
For more information on small and micro-entity reporting visit icaew.com/smallcompanyreporting
Dormant subsidiaries are not required to prepare or file individual accounts for a financial year when certain conditions are met, including the existence of a statutory guarantee by the parent of all of the subsidiary’s outstanding liabilities at the year-end.
Prior to the amendments the parent giving the guarantee had to be incorporated in an EEA state. This has now changed to the parent being registered in the UK, making the exemption more restrictive. However, the UK parent does not have to be the immediate parent of the subsidiary.
Subsidiary audit exemption
Similarly, a subsidiary may be exempt from audit when certain conditions are met, including the existence of a statutory guarantee by the parent of all the subsidiary’s outstanding liabilities at the year-end.
Prior to the amendments the parent providing the guarantee had to be incorporated in an EEA state and the subsidiary included in the consolidated accounts prepared in an ‘equivalent’ manner (see above). This has now changed to the parent being registered in the UK. Again, the UK parent does not have to be the immediate parent of the subsidiary.
Change in accounting framework
A company may switch from IFRS to UK GAAP provided five years have elapsed since the last time it switched from IFRS to UK GAAP, unless there has been a relevant change in circumstance. A relevant change in circumstance previously included:
- An entity ceasing to be traded on an EU-regulated market; and
- Ceasing to be a subsidiary of a parent whose securities are traded on an EU-regulated market.
The reference has been changed to a UK-regulated market, restricting the opportunities for a company to switch back to UK GAAP.
Accounting reference period
Generally, a company may not extend its accounting period more than once in any five-year period unless it is acquired by a UK parent with a different year end.
Previously, the exception to the general rule was also available to subsidiaries of EU undertakings. Whereas the other changes mentioned in this guide are effective for accounting periods beginning on or after 1 January 2021, this change came into effect at 11pm on 31 December 2020.
Non-financial information statement
For those companies otherwise in scope of the non-financial information (NFI) statement, an exemption is only available if its parent prepares a consolidated strategic report containing a group NFI statement. The NFI statement is a UK requirement and, therefore, there is no exemption for subsidiaries of EEA parents that prepare a management report, even if the content is similar.
More information on the scope and content of the NFI statement is available as part of the faculty’s page on the strategic report.
A member of a qualifying partnership is exempt from the requirement to prepare accounts for the qualifying partnership, and append those accounts to its own filed accounts, only if the qualifying partnership is consolidated by a UK entity. Previously this exemption was available if the qualifying partnership was consolidated by an EEA entity.
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