Changes to accounting following Brexit
Whilst the issues relating to Brexit rage on through Parliament, there have been a couple of developments issued by regulatory bodies as to how accounting and auditing will be affected by Brexit. Steve Collings summarises those developments.
The FRC and the Department for Business, Energy and Industrial Strategy (BEIS) have published letters and guidance for accountants and auditors in the event that Britain leaves the EU without a deal.
UK GAAP will be unaffected but in terms of entities reporting under IFRS this does not remain the case. Currently, the UK adopts IFRS as adopted in the EU which will not be legally possible once Britain leaves the EU. At the point of Britain’s exit, the Withdrawal Act brings into UK law those International Accounting Standards which have already been endorsed in the EU in order to provide continuity.
It is expected that a newly formed UK endorsement body will be in operation during 2019 and, at the time of writing, this issue was still being debated by Parliament. Further updates will be published once developments arise.
The letter to auditors is focused on the recognition of audit qualifications, third-country auditor status and updating the definition of a ‘public benefit entity’ to remove those entities which have securities traded on non-UK regulated markets.
Auditors with EU qualifications will have a transitional period of recognition up to 31 December 2020 to obtain UK accreditation, although most Republic of Ireland bodies will not be affected as these are recognised in the UK.
Changes to company law
The government has issued The Accounts and Reports (Amendment) (EU Exit) Regulations 2019 (SI 2019/145). The regulations outline the changes that will be made to accounting and reporting as a consequence of Britain leaving the EU. This article considers some of the more notable changes brought about by SI 2019/145.
2019/145 includes transitional provisions which apply in relation to financial years which begin before but end on or after exit day. As most are aware, Britain is due to leave the EU at 11pm on 29 March 2019. However, the regulations refer to ‘exit day’ rather than 29 March 2019 in the event that exit day is delayed.
SI 2019/145 includes legislation to protect qualification as a small company and filing exemptions for both companies and limited liability partnerships.
References to ‘regulated market in an EEA State’ is changed to refer to ‘UK regulated market’. For example, as in section 384 Companies excluded from the small companies regime, s384(2)(b) is amended to state: ‘A group is ineligible if any of its members is a body corporate (other than a company) whose shares are admitted to trading on a UK regulated market’ [the underlined section previously stated 'regulated market in an EEA State'].
The consequence of this is that a company can only qualify as a small entity if they are not admitted to trading on a UK regulated market (references to the European Economic Area are replaced with references to the UK throughout in the Companies Act 2006 and in the supporting regulations).
Under the amended section 394A Individual accounts: exemption for dormant subsidiaries, a dormant company will only be exempt from preparing and filing financial statements if they have a guarantee from a UK parent entity. A guarantee is given by a parent when the directors of the subsidiary company deliver a statement to Companies House by the parent undertaking that it guarantees the subsidiary under section 394C(1). Section 394C(2)(b) is amended so that this statement must specify the registered number of the parent undertaking (if any).
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Currently, section 394C(2)(b) requires the statement to specify if the parent undertaking is incorporated in the UK and its registered number (if any).
In addition, section 394A(1)(c) is amended so that a company is exempt from the requirement to prepare individual accounts for a financial year if it is dormant and its parent undertaking is established under the law of any part of the UK (rather than under the law of an EEA State).
For intermediate parent companies, section 400 of the Companies Act 2006 is amended so that the section is headed up:‘400: Exemption for company included in UK (previously EEA) group accounts of larger group’
In addition, section 400 is changed so that the current exemption from preparing group accounts will only be available where the immediate parent that prepares consolidated financial statements for the group is based in the UK as opposed to being an EEA parent.
The heading in section 401 is changed so that it refers to ‘non-UK group accounts’ rather than ‘non-EEA group accounts’ ie:‘401 Exemption for company included in non-UK (previously EEA) group accounts of larger group’
The exemption currently available in section 401 where there is a non-EEA parent entity preparing group accounts “in a manner equivalent to consolidated accounts and consolidated reports so drawn up” is amended so that they will be drawn up in accordance with the requirements of s401 of the act (ie groups with an EEA parent will be included).
SI 2019/145 makes amendments to company law in the area of accounts and reports required by companies, building societies, friendly societies, certain types of partnerships, LLPs and overseas entities (an overseas entity is one which is incorporated outside of the UK).
Schedule 1 makes some minor and technical amendments under section 2(2) of the European Communities Act 1972 (c. 68), which updates some cross-references to EU law before exit day.
Schedule 2 amends primary legislation (Companies Act 2006, the Friendly Societies Act 1992 (c. 40) and the Building Societies Act 1986 (c.53)).
Schedule 3 amends secondary legislation relating to the production of accounts and reports (including reports on payments to governments) for those businesses within the scope of the Regulations.
Further articles will be produced once the situation concerning Brexit becomes clearer. It is currently uncertain whether, or not, Britain will leave with a deal and hence further updates will be published as and when developments take place.
Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd where Steve trained and qualified.