At a glance
The UK is due to leave the European Union (‘EU’) on 31 January 2020. There will then be a transitional period, due to run to 31 December 2020, during which the UK will no longer a member of the EU but will still be subject to EU rules and remain a member of the Customs Union. During the transition period, the UK and EU will negotiate the rules to be applied to our future trading and other relationships. The UK can request, and the EU will grant, an extension to the transition period of up to another two years (so long as this is done by 30 June 2020) if it appears that negotiations are taking longer than expected. Ultimately, a no-trade deal Brexit remains a possible outcome.
UK businesses should be considering how this new political landscape will impact their organisations. Irrespective of the outcome of negotiations during the transition period, whether that concludes with or without a trade deal, there will likely be significant changes for many UK businesses. But this is not just a concern for UK businesses, Brexit might also impact overseas entities doing business with the UK, as well as groups with substantial UK operations.
For some businesses, these impacts could be significant. The consequential accounting and reporting implications include:
- Disclosures - Detailed and entity-specific disclosure of Brexit-related risks should be made to explain the judgements taken, assumptions made and the impact on the entity’s operations. The UK’s Financial Reporting Council (‘FRC) and other regulators have made it clear that they expect entities to disclose information about the specific and direct challenges to their business model and operations, as distinct from information about broader economic uncertainties. Where there are particular threats, for example the possible effect of changes in import/export taxes or delays to their supply chain, the regulators expect entities to identify these clearly and for management to describe any actions they are taking, or have taken, to manage the potential impact. The broad uncertainties that may still attach to Brexit when companies report will require disclosure of sufficient information to help users understand the degree of sensitivity of assets and liabilities to changes in management’s assumptions.
- Subsequent events - Careful analysis is required to identify whether the impact of events that occur between the year end and the date of signing the financial statements would require either an adjustment to the amounts recognised at period end or disclosure only, or whether the ability of the entity to continue as a going concern is called into question.
- Impairments and valuations - Valuations, measurements and recoverable amount calculations that use market inputs should reflect market data at the balance sheet date. If valuation techniques and estimates are applied, cash flow models for impairment testing will likely require a wider range of outcomes than usual to reflect a broad spectrum of possible Brexit scenarios.
- Restructuring - Some entities have already or are considering reorganising their business. It is unlikely that contemplated restructuring will have an immediate impact on the financial statements.However, plans over time could result in a impairments/disposals of assets, recognition of provisions or changes to segments and disclosure. In addition, the accounting for group restructurings in separate accounts can be complex, in particular, for the individual entity receiving a business in a common control transaction.
- Directors duties and dividends - Directors need to consider, apart from statutory duties, their fiduciary duties to safeguard the company’s assets and ensure that the company is able to pay its debts as they fall due. This would be relevant when deciding on dividend payments as Brexit might affect the company’s financial position.
- Tax - The withdrawal agreement and any new trade agreement, when finalised, could result in significant changes to the tax law that applies to UK and EU companies. Some of the main areas that could be impacted by Brexit include tax on rolled-over gains from certain previous reorganisations, withholding taxes on certain dividends and measurement of deferred tax assets.
- Interim reporting - Entities need to consider the extent to which additional disclosures are necessary in any interim report, to explain changes since the last annual report.
We will continue to update our financial reporting guidance as the full impact of Brexit develops.