Brexit implications for accounting and filing

Apr 01, 2019

This article discusses reflecting the impact of uncertainty in financial statements, accounting and filing exemptions, and financial reporting frameworks.

Since June 2016, much attention has been paid to the potential implications of Brexit on all aspects of business and society in general. Institute commentary has focused on the recognition of UK auditors in Ireland, taxation, customs and excise, and other business issues. So, what is the situation regarding financial reporting and filing? In this article, we will discuss a number of matters arising in the context of Brexit.

1. Brexit uncertainty – some specific accounting matters/considerations

We discuss the primary financial reporting frameworks in more detail in section three of this article. Suffice to say at this point that, immediately following Brexit, the Financial Reporting Council (FRC) will continue to be recognised in company law as accounting standard setter in both jurisdictions, so UK and Irish GAAP (FRSs 100 to 105 and company law requirements) will continue to apply. In Ireland, EU-adopted IFRS will also continue to apply while in the UK, transitional provisions will apply such that IFRS preparers will either apply EU-adopted IFRS (for financial periods beginning before the exit date) or UK-adopted IFRS (for financial periods beginning on or after the exit date).

We do not know at the time of writing what shape Brexit will take – deal or no deal, and if a deal is reached, whether or not it will differ substantially from the original EU/UK withdrawal agreement. Whatever shape it takes, uncertainty will still exist post-exit date and we won’t have all the relevant answers. Clearly, a no-deal Brexit means substantially increased uncertainty for companies. Uncertainty can impact on companies’ financial statements in various ways, for example, on key areas of judgement and estimation, cash flow projections for use in impairment calculations etc. To what degree individual companies are impacted by Brexit uncertainty will be determined primarily by their specific circumstances, for example, the significance of UK customers and/or suppliers to Irish companies, or EU customers and/or suppliers to UK companies.

The FRC issued a letter to audit committee chairs and finance directors in October 2018, which draws on findings from the FRC’s work on corporate governance and corporate reporting and inter-alia highlights a number of key areas of financial reporting potentially impacted by Brexit. Other publications have issued from the FRC/Department for Business, Energy and Industrial Strategy and various other sources, including from the large accounting firms and the ICAEW, also discussing potential implications for financial reporting. While many of these publications have been written in a UK context, and for UK GAAP and IFRS accounts, similar considerations will likely apply for Irish companies, particularly those with significant interests and/or transactions in the UK. Using references to FRS 102, we discuss some of the issues raised in those documents below.

Judgement and estimation

The levels of uncertainty surrounding the form that Brexit will take and the potential implications thereof on companies and their operations mean that all aspects of financial statements requiring the application of judgement and estimation may well be affected. Issues of particular relevance in terms of the application of significant judgement and estimation may include:

  • Impairment of assets: the recoverable amounts of fixed assets such as property, plant and equipment, goodwill and intangible assets; assessments about the recoverable amounts of inventories, accounts receivable (due to Brexit implications for significant customers) and the impact of currency fluctuations; and

  • Valuations and estimates: such as fair values for investment properties, and valuations and estimates in relation to share-based payments, pension obligations and tax.

Events after the balance sheet date

The October FRC letter reminds companies to “incorporate a comprehensive post balance sheet events review in their year-end reporting plan”. Section 32 of FRS 102 requires reporting entities to consider whether post balance sheet events are adjusting or non-adjusting events. The FRS 102 requirements are unchanged in light of Brexit developments and judgement is required in identifying if an event is adjusting or non-adjusting. However, given the ongoing political debates continuing deep into March 2019, it would seem likely at this stage that changes in the direction/nature of Brexit would be non-adjusting events for December 2018 year-ends.

Going concern considerations

In the more extreme cases, where companies are particularly negatively impacted by Brexit, there is an exception to the general adjusting/non-adjusting rule for events after the balance sheet date. The exception is that a “deterioration in operating results and financial position after the reporting period”, such that the going concern assumption underlying the preparation of the financial statements is deemed no longer appropriate, becomes an adjusting event as the “effect is so pervasive” to the true and fair view given by the financial statements.

Where companies are particularly heavily exposed to Brexit risks, management will need, in accordance with FRS 102 paragraph 3.8, to make an assessment of the entity’s ability to continue as a going concern. In making this assessment, management must take into account all available information about the future, “...at least, but not limited to, twelve months from the date when the financial statements are authorised for issue”. Projections and estimates used in this regard should be consistent with those used in relation to impairment assessments. Sensitivity analyses on cash flow projections, reflecting Brexit uncertainty, and incorporating perhaps a wider range of reasonably possible outcomes, may be necessary.

Restructuring

Companies may consider restructuring initiatives in light of Brexit. Again, the accounting requirements in FRS 102 in this regard are not changed by Brexit. Paragraph 21.11D requires that “an entity recognises a provision for restructuring costs only when it has a legal or constructive obligation at the reporting date to carry out the restructuring.” Even where such an obligation is not in existence at the year-end, the fact that the company is considering restructuring measures may be an indication that a relevant asset or assets may be impaired (see paragraph 27.9).

Disclosures

Section 8 of FRS 102 requires the disclosure of:

  • “...judgements, apart from those involving estimations... that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements”; and
  • “...information about the key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year”.

Companies significantly impacted by Brexit uncertainty are likely to need to include reasonably extensive disclosures on relevant accounting issues, such as the matters discussed above. For example, very careful consideration may need to be given to disclosures regarding:

  • Any material uncertainties that cast significant doubt on the entity’s ability to continue as a going concern (paragraph 3.9);
  • Impairment of significant assets (paragraphs 27.32 to 27.33A);
  • The nature and extent of risks arising from financial instruments – credit risk, liquidity risk and market risk (paragraphs 11.42, 34.23 to 34.30);
  • Post balance sheet non-adjusting events (paragraph 32.10). Paragraph 32.11 contains examples of non-adjusting events that would generally result in disclosure, including the “announcement, or commencement of the implementation, of a major restructuring”.

The October FRC letter emphasised its expectation that Brexit disclosures would highlight specific and direct challenges arising from Brexit, and distinguish them from information about broader economic uncertainties. Such information may also be provided by way of cross-reference to the directors’ report/strategic report, where the information is provided within the business review.

Companies applying the small companies regime may not be specifically required by law to provide some of the detailed disclosures, but may consider the provision of such information in the context of the overarching legal requirement for the financial statements to give a true and fair view. Even where not necessary, such information may still be considered useful in the context of the information needs of key external stakeholders, such as funders and suppliers.

Even where companies deem themselves to be less affected/negligibly affected by Brexit, it may be worthwhile to consider explaining the basis for this conclusion.

‘Principal risks and uncertainties’

Company law in both jurisdictions requires the company to provide a fair review of the business of the company and a description of the principal risks and uncertainties facing the company (in Ireland in the directors’ report; in the UK in the strategic report). Clearly, directors of companies exposed to significant Brexit risks will have to provide the necessary information in this review and description, and such information should be considered for consistency with the financial statements. Companies applying the small and micro companies regimes are exempted from this requirement to disclose principal risks and uncertainties, though they may elect to provide the information.

2. Brexit implications for certain accounting and filing requirements in Ireland and the UK 

Both the Companies Act 2014 (CA 2014) in Ireland and the Companies Act 2006 (CA 2006) in the UK have numerous references to ‘EU’ and ‘EEA’. We set out below some accounting and filing issues linked to these references. The discussion is not intended to be comprehensive and should not be read as such.

Ireland

If, following Brexit, the UK is no longer a member of the EEA, a range of accounting and filing exemptions in CA 2014 may be impacted. These include:

  • Section 357: exemption for subsidiary companies from annexing financial statements to the annual return where its parent is established under the laws of an EEA state, and subject to various conditions being satisfied.
  • Section 299: exemption from the requirement to prepare group financial statements for an intermediate parent company that is a subsidiary, where its parent is established under the laws of an EEA state and certain conditions are met. It may be possible for such subsidiaries of UK parents to instead be able to avail of the exemption in section 300 for subsidiaries of non-EEA state parents, subject to the conditions in that section.
  • Branches of UK companies: the CRO website, in its Preparing for Brexit pages, states that such branches registered in Ireland do not have to re-register in the event of a ‘no-deal’ Brexit. They would become non-EEA branches and would have to abide by the filing requirements for non-EEA branches post-Brexit (sections 1304, 1305 and 1306).

UK

The UK Government has issued SI No. 145 of 2019 The Accounts and Reports (Amendment) (EU Exit) Regulations 2019, which includes amendments addressing a number of the EEA/EU references relating to accounting and filing in
CA 2006. While these regulations generally come into effect on ‘exit day’ as defined in the European Union (Withdrawal) Act 2018, there are a number of transitional provisions dealing with amendments taking effect by reference to financial years – space constraints preclude us from dealing with the detail here. The implications of some of the changes made by the regulations include:

A UK intermediate parent company with an immediate EEA parent will no longer be exempt from producing group accounts (section 400). Such companies may be required to prepare and file group accounts unless they meet the conditions set out for companies included in the group accounts of a non-UK parent in section 401.
The exemption from preparing individual accounts for UK registered dormant company subsidiaries would only be available to certain subsidiaries of UK parents, not EEA parents.

In addition, UK companies with a subsidiary listed on an EEA regulated market will need to check the relevant reporting requirements where the subsidiary is based – Article 2(3) of the Transparency Directive states: “Where the issuer is not required to prepare consolidated accounts, the audited financial statements shall comprise the accounts prepared in accordance with the national law of the member state in which the company is incorporated”. Article 2(3) would no longer apply to UK companies post-Brexit.

UK companies with branches operating in an EEA state will also need to check relevant reporting requirements.

Other reporting requirements/exemptions that may be impacted in both jurisdictions include, for example: exemptions from providing a non-financial statement, requirements to provide a diversity report, and exemptions with regard to the alteration of accounting reference dates.

Certain requirements/exemptions make reference to defined terms in company law such as “ineligible entities”, “public-interest entities” and “traded company”, which contain references to EU/EEA state. As such, the scope of these requirements/exemptions may change post-Brexit (e.g. the small companies regime).

3. The primary financial reporting frameworks in Ireland and the UK following Brexit UK and Irish GAAP financial statements

Member state company law accounting requirements must comply with the EU Accounting Directive (Directive). In Ireland, this will continue to be the case for CA 2014.

The UK Government has stated its objective of ensuring as far as possible that the requirements of CA 2006 and related regulations will continue to apply post-Brexit. There would, however, be scope over time for these requirements to deviate from the Directive. This is not expected, however, to happen in the short-term.

FRSs 100 to 105 have been developed by the FRC to be compliant with the Directive. Post-Brexit, it is not anticipated that any significant changes will be made to the FRSs in the near-term. They will continue to contain separate Irish legal references and should future amendments to the FRSs not fully comply with the Directive, it is likely that the FRC will be able to deal with this by including separate UK-only and Irish-only requirements as appropriate.

IFRS financial statements

In Ireland, this is straightforward – EU-adopted IFRS will continue to apply.
In the UK, draft legislation provides that UK-adopted IFRS will apply to financial periods beginning on or after exit day. For financial periods beginning before exit day and ending thereafter, UK companies can continue to apply EU-adopted IFRS. On exit day, UK-adopted IFRS will be EU-adopted IFRS, though a UK endorsement process will be established to subsequently decide on the adoption of new or amended standards.

Concluding remarks

By the time this article is published, 29 March will have come and gone. We may or may not have a clearer picture of the form that Brexit takes, but we also know that uncertainty will remain – for some companies more than others. Depending on individual company circumstances, this uncertainty may significantly impact measurement in the financial statements and Brexit-related disclosures may be extensive.

Separately, companies will need to give some consideration to the continuing availability of certain company law accounting and filing exemptions. 
The Institute will monitor developments and keep the need for further guidance under review.

Mark Kenny is Director, Representation & Technical Policy at Chartered Accountants Ireland. Barbara McCormack is Manager, Representation & Technical Policy at Chartered Accountants Ireland.