Brexit Implications on Financial Reporting
As the transition period for Britain’s exit from the EU ends at 11pm on 31 December 2020, what does this mean for financial reporting going into 2021?
Brexit has somewhat been subordinated in the mainstream media because of Covid-19 but over recent weeks it has been given more prominence in the headlines. Will a deal be reached or not? At the time of writing this article there was still no deal, despite Boris Johnson’s claim that his deal was ‘oven ready’.
In terms of financial reporting, the good news for UK GAAP reporters is that there should not be very much in the way of change to current practice. This is, of course, great news for practitioners in the UK whose client bases are private entities that report under UK GAAP.
However, at the time of writing, it is expected that the Financial Reporting Council (FRC) will issue further amendments to UK GAAP which are Brexit-related. It is likely that these amendments will be issued by the FRC at some point in December 2020 and practitioners will need an understanding of them in order to be able to advise clients correctly.
The amendments to UK GAAP will not be open for consultation (as would normally be the case for a change to UK accounting standards). This is because the changes are required by law and, where a legislative change is required to an accounting standard, the FRC tend to just make the amendment because they have to. If they did not do this, UK GAAP would be inconsistent with the requirements of company law and this cannot happen.
It is expected that the ‘effective date’ of the Brexit-related amendments will be for accounting periods starting on or after 1 January 2021 (i.e. December 2021 year ends). It could be the case that in certain situations, early adoption may be permissible. It is fair to say that, in practice, most accountants tend not to early adopt a change until they are mandated to and it is likely that this will be the case where the Brexit-related amendments are concerned.
So what are we to expect from these amendments?
It is expected that most of the changes will merely relate to changing references to ‘EU-adopted IFRS’ to ‘UK adopted IFRS’ (which will mean IFRS adopted in the UK); and ‘adopted IFRS’ (which, for entities in the Republic of Ireland, will refer to EU-adopted IFRS). It is also expected that changes will need to be made to legal references (e.g. references to EU Regulation).
These changes are unlikely to have a huge impact in the short-term on reporting entities. In a lot of cases, automated accounts production software systems are likely to pick up the changes where they apply, but it is always advisable for the accountant to review the financial statements to ensure any changes are being correctly referred to in the financial statements.
UK GAAP comprises the following standards:
- FRS 100 Application of Financial Reporting Requirements
- FRS 101 Reduced Disclosure Framework
- FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland
- FRS 103 Insurance Contracts
- FRS 104 Interim Financial Reporting
- FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime
The last comprehensive review of the above standards was through the triennial review which was finalised in 2017 and which apply mandatorily for accounting periods commencing on or after 1 January 2019. Following the amendments to UK GAAP in respect of Brexit, it is likely that the FRC will reissue further editions of the above standards in the Spring of 2021 which will consolidate all the changes made since March 2018. The effective date for the revised standards is likely to be for accounting periods commencing on or after 1 January 2021 which will apply to the amended legislation itself.
UK adopted IFRS
Currently, the UK applies ‘EU-adopted IFRS’ for those entities that apply the IAS Regulation in the preparation of their financial statements – for example, listed groups. For companies and groups incorporated in the UK that apply IFRS, it will not be possible to use EU-adopted IFRS once the transition period is over (i.e. for accounting periods beginning on or after 1 January 2021). This is discussed further in the section below ‘IFRS reporters’.
The secretary of state has passed a Statutory Instrument in the form of The International Accounting Standards and European Public Limited Liability Company (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/685) which allows the secretary of state to delegate the adoption function. The adoption of UK IFRS will be carried out by a separate body of the FRC who will endorse IFRS for use in the UK.
One notable point is that the International Accounting Standards Board have issued IFRS 17 Insurance Contracts which applies mandatorily for accounting periods commencing on or after 1 January 2023. At the time of writing, IFRS 17 had not been endorsed in the EU and is unlikely to be endorsed in time for Britain’s transition period ending. Hence, unless the EU adopts this standard before 31 December 2020, it will be left to the FRC to endorse it for use in the UK.
As the UK will essentially ‘stand on its own two feet’ where IFRS endorsement is concerned, there may well be diversity between EU-adopted IFRS and UK-adopted IFRS as time progresses.
IFRS reporters in the UK
Currently companies in the UK which prepare their financial statements under IFRS use EU-adopted IFRS and this can continue until ‘Implementation Period’ (IP) completion day, which is at 11pm on 31 December 2020.
Company law contains a transitional provision for companies whose financial years straddle the IP completion day. These are financial years which:
(a) begin before IP completion day but end on or after IP completion day; and
(b) end shortly before but file their accounts after IP completion day.
Companies preparing their financial statements under IFRS whose reporting date straddles IP completion day can still prepare their financial statements under EU-adopted IFRS. At 11pm on 31 December 2020, the standards adopted by the EU will be ‘frozen’ and brought into UK law. For accounting periods which start after IP completion day (i.e. those starting on or after 1 January 2021), IFRS reporters will not be able to use EU-adopted IFRS and must instead use those adopted by the UK under the new financial reporting framework.
Example
Sunnie PLC is a listed company incorporated in the UK and currently prepares its financial statements under EU-adopted IFRS. It has a 31 March accounting reference date.
In respect of the financial year ending 31 March 2021, Sunnie will prepare its financial statements under EU-adopted IFRS. This is because this accounting period starts on 1 April 2020 (i.e. before IP completion day).
For the year ending 31 March 2022, Sunnie will prepare its financial statements under UK-adopted IFRS. This is because this accounting period starts on 1 April 2021 (i.e. after IP completion day.
Other EU-exit impacts
In January 2019, The Accounts and Reports (Amendment) (EU Exit) Regulations 2019 (SI 2019/145) was issued.
SI 2019/145 replaces several references to ‘EU’ or ‘EEA’ with references to UK, the impact of which is as follows:
Equivalence
Currently, section 401 of the Companies Act 2006 provides an exemption, subject to certain conditions, for an intermediate parent from preparing group accounts where its parent is not established under the law of an EEA state. This exemption can be applied provided the company, and all of its subsidiary undertakings, are included in the consolidated financial statements for a larger group drawn up to the same date, or to an earlier date in the same financial year, by a parent undertaking.
After IP completion day, this exemption is based on an equivalence test to UK requirements. At the time of writing, more detail is still awaited to see how equivalence will be determined although it is expected that changes will be fairly minimal in terms of its impact.
Dormant subsidiaries
Companies Act 2006, s394A currently allows EEA parents an exemption from preparing individual accounts for dormant subsidiaries. After IP completion day this exemption will only be available to subsidiaries of UK parents. So, for example, the exemption will not be available for a dormant subsidiary of, say, a French parent.
Intermediate parent group accounts exemption
SI 2019/145 made amendments to the section 400 exemption for intermediate parents that are owned by an EEA parent and the section 401 exemption for intermediate parents which are owned by a non-EEA parent. After IP completion day these will only refer to the company being owned by a UK parent and a non-UK parent respectively.
Therefore, where a company took advantage of the s400 exemption from preparing group accounts on the basis that it had, for example, a French parent, then it will no longer be able to claim this exemption following IP completion day because its parent is outside of the UK. It can, however, take advantage of the same exemption under s401 (for companies with a non-UK parent).
Small companies qualification
An ‘ineligible group’ for the purposes of determining exclusion from the small companies regime (as set out in s384 of the Companies Act 2006) includes a UK, rather than an EEA, traded entity. This effectively widens the scope of the exemption – so, for example, a group which includes a French listed company will not be ineligible just because that company is listed.
Changing an accounting reference date
Section 392(3) of Companies Act 2006 prohibits a company from extending its accounting period more than once every five years. However, s392(3)(a) currently states that this does not apply to a company that is a subsidiary undertaking or parent undertaking of another EEA undertaking if the new reporting date coincides with that of the other EEA undertaking.
The amendments made by SI 2019/145 means that it only applies to a company acquired by a UK (rather than an EEA) entity with a different year end. Hence, if a UK company is acquired by a French parent, then the UK company cannot extend its year end again if it has done so within the last five years.
Transition to a new accounting framework
It will be harder to switch from IFRS to UK GAAP after IP completion day because the relaxation of the rule which prohibits switching from IFRS to UK GAAP will apply when the company ceases to be a UK-listed entity (or when its parent ceases to be a UK-listed entity), rather than an EEA-listed entity.
Political donations
Disclosures will be needed in the directors’ report in respect of contributions to non-UK political parties rather than non-EU political parties.
Non-financial information in the strategic report
Section 414CA contains an exemption from preparing a non-financial information statement which is only available to subsidiaries when the parent produces a group strategic report which includes a group non-financial information statement. This exemption will not be available to subsidiaries of EEA parents which prepare a consolidated management report (including a non-financial information statement) under EU legislation.
Share structures
Disclosures will be needed in the directors’ report in respect of control and share structures for companies which are traded on a UK-regulated market rather than an EEA-regulated market.
Entities that are not companies
SI 2019/145 also amends legislation which applies to entities which are not companies (e.g. partnerships, friendly societies and LLPs). Hence entities which are not companies will be subject to the same amendments as above.
FRC monitoring of financial reports
SI 2019/145 only allows the FRC to scrutinise financial reports of companies with issued transferable securities that are admitted to trading on a UK-regulated market rather than an EEA-regulated market as before.
Overseas companies
An overseas company whose parent law requires it to prepare, have audited and publish its financial statements will still be able to lodge its financial statements with Companies House. However, a company incorporated in the EEA which is not required to have its financial statements audited or filed will not be able to file those accounts. Instead it must file financial statements (which do not have to be audited) which are prepared in accordance with The Overseas Companies Regulations 2009 (SI 2009/1801).
Conclusion
The financial reporting effects of Brexit are going to affect a lot of entities – some more than others. Future articles will be published to explain any new developments or emerging issues as the UK progresses into 2021 but it is important that preparers of financial statements in the UK obtain a sound understanding of the changes so they can advise reporting entities correctly.
Category: Accounting and standards
