It’s been more than a year and a half since the EU referendum took place, and how much do we really know about post-Brexit Britain?
The answer appears to be: not much. A quick glance at the morning news will confirm that conjecture and speculation are the order of the day.
The issue of what will happen to UK accounting standards after our EU departure is no exception. The Institute of Chartered Accountants of England and Wales (ICAEW) has warned that not enough thought has been given to Brexit’s implications on the financial reporting framework.
Most UK businesses currently adhere to UK Generally Accepted Accounting Principles (GAAP) standards, adopting either FRS 102 or FRS 101, depending on whether the company meets certain criteria — both FRS 102 and FRS 101 must comply with both the Companies Act 2006 and related regulations.
Since January 2015, these standards have closely mirrored those of the International Financial Reporting Standards (IFRS), but remain a simplified version, demanding fewer disclosures.
IFRS was introduced to standardise financial reporting throughout the EU and has become increasingly popular throughout the world. It’s viewed by many as the benchmark of high-quality accounting standards.
As a member state of the EU, UK accounting laws have been bound to fall in line with the laws laid out by the EU — will this alignment continue after March 2019, or will the UK seek to overhaul current accounting standards?
Setting the standard
There is speculation that the UK will fully adopt IFRS, and there are some clear benefits to this strategy.
While some nations prefer GAAP, many countries now favour a consistent set of international standards and welcome the IFRS. In a global marketplace, investors look to financial statements to compare profitability and solvency, and operating with a single set of high-quality standards allows for full transparency on a company’s performance.
Using differing accounting standards makes it harder for international investors to do their due diligence, while a lack of consistency in standards has allowed some businesses to find loopholes, opening up the possibility of deceiving investors. A key question we must ask is whether or not a post-Brexit UK can afford to turn off potential investors by not adhering to international standards.
Matters of outside investment aside, a single set of standards makes life easier for businesses with multiple subsidiaries to consolidate financial reports — particularly when more than one currency comes into play. It’s worth considering what a complete overhaul of reporting standards might mean for UK businesses whose parent company lies within the EU.
Is there a viable alternative to IFRS?
So is it possible that the UK might head in a different direction entirely, abandoning all thoughts of the EU-adapted IFRS? We simply don’t know, but we think that’s unlikely.
Any move away from IFRS would have a significant impact on companies currently using IFRS, as well as those seeking to make themselves more attractive to global trade and outside investment.
The UK has long held a strong influence over developments in financial reporting, and it’s thought that a move away from the internationally-favoured standards would be seen as a huge backwards step. A step we can’t really afford to take as we try to establish our new position on the world stage.
The general consensus seems to be that, while we navigate this period of political instability and economic uncertainty, we should seek to maintain consistency as far as possible. However, others argue that — once the Brexit dust has settled — freedom from EU directives will allow for a significant review of current UK company laws, including financial reporting standards.
Change within the EU?
The UK has always been a strong advocate for the IFRS and the standards were drafted to allow for UK legislation, such as the Companies Act 2006. Some have questioned whether the EU itself will stand by IFRS without Britain’s voice of support for the standards. What would international trade and business look like with multiple sets of reporting standards?
For now, the only certainty is that we have more questions than we have answers and it’s entirely possible that, for the time being at least, very little will change.
Our supposition is that the UK will want to continue its commitment to high-quality reporting standards, while seeking to maintain its influence over international consistency and prove itself as a strong contender in the global marketplace. However, the one question that must be answered is: is adoption of IFRS the most effective way to do this, or is there another option?
Do you think post-Brexit Britain should adopt IFRS? Let us know in the comments below.
About Nick Pearce
Nick Pearce works as a Digital Marketing Executive for Clear Books plc, an online accounting software company.
Clear Books is a small business that supports small businesses. We provide clear and simple, award-winning software that's tailored towards UK businesses, allowing them to save time and work smarter by managing their accounts in the cloud. With our online software, small businesses and accountants can access their books anywhere, at any time.
We're also helping small businesses to prepare for the launch of Making Tax Digital, which will drastically change the way they submit their financial information to HMRC.