FRC and UK government provide Brexit transition detail
The UK’s Financial Reporting Council (FRC) and the UK government’s Department for Business, Energy, and Industrial Strategy have confirmed there is no substantive change to accounting and corporate reporting during the transition period following the UK’s formal departure from the EU on 31 January. They also confirmed in a separate letter no changes for UK and European Economic Area (EEA) auditors.
The secondary legislation for the accounting and audit sectors that the UK government laid before Parliament over the past two years did not come into force on 31 January, as the UK left the EU on the terms of the Withdrawal Agreement. Instead, it will come into force on 31 December — at the end of the transition period.
However, there will be some change after that. For financial years beginning after 31 December 2020, UK incorporated companies and groups that currently use EU-adopted International Accounting Standards (IAS) will instead be required to prepare accounts using UK-adopted IAS. There will be no change for UK incorporated companies that use UK GAAP to prepare their annual accounts. For financial years beginning after 31 December 2020, UK-listed companies will need to prepare accounts using UK-adopted IAS.
For financial years beginning during the transition period, UK companies with a UK listing can continue to use EU-adopted IAS. Any new or amended standards adopted by the EU during the transition period can be used. Companies have two options: Either they choose to use EU-adopted IAS as they existed at the end of the transition period or they can choose to apply the “new” UK-adopted IAS. Companies using this second option will be required to state this clearly when preparing their accounts for that financial year.
The FRC also sets out in its information for accountants that:
- UK incorporated parent companies with immediate subsidiaries based in the EEA, that themselves are intermediate parent companies, “can continue to rely on the equivalence of UK GAAP for the purpose of exemptions for their EEA-based subsidiary”. At the end of the transition period, the FRC said the UK Companies Act’s corporate reporting requirements may not be deemed automatically equivalent to the EU’s Accounting Directive. The FRC therefore advises these companies to check the relevant reporting requirements in the EEA country where the subsidiary is based.
- For UK public companies with a debt listing on an EU-regulated market, there will be no change to the reporting requirements during the transition period. After the end of the transition period, these groups “may need to comply with local EEA regulatory provisions, for the EEA country where they have listed their debt”, the FRC said. This would be in addition to filing accounts in the UK, the FRC said, adding that companies can make use of the period until 31 December to prepare for any changes that might later affect them.
During the transition period, UK public interest entities, such as banks, building societies, and insurers, will continue to be subject to the requirements for an audit committee contained in the Disclosure and Transparency Rules issued by the Financial Conduct Authority, and other rules issued by the Prudential Regulation Authority. Additionally, UK companies will still need to appoint a UK-registered audit firm.
Status of existing exemptions
EEA companies with a UK-incorporated subsidiary “will continue to benefit from existing exemptions from preparing and filing of accounts” during the transition period, the FRC said.
However, from 1 January 2021, “intermediate UK companies with an immediate EEA parent may not be exempt from producing group accounts”. Other exemptions that might be removed relate to producing nonfinancial information statements and alteration of accounting reference dates.
EEA public companies with a UK listing “will continue to be able to prepare their accounts in accordance with EU-adopted IAS” during and after the transition period.
The FRC also notes that “UK-registered dormant companies with EEA parents will need to file individual annual accounts with Companies House for financial periods beginning after 31 December 2020”.
Meanwhile, the UK Endorsement Board is being set up and is likely to be operational later this year. It will work to assess, endorse, and adopt any new or amended IAS published by the IASB.
— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.