How Will Brexit Affect Company Accounts?

The UK has now left the EU.  We have all become aware of the effects which Brexit has had on VAT, duties and various other aspects of business.  It is perhaps then to surprising that Brexit will not have a particularly significant impact on the form and content of company accounts in the UK.

The accounts of smaller companies in particular will, in most cases, look exactly the same after Brexit as they did before.  There are, however, a number of areas in which Brexit will bring changes.

Company law

As a result of Brexit, company law has changed so that references to the EU or EEA have been replaced by equivalent references to the UK.  The principal effects of this are:

• Small and medium sized companies which are part of a group whose shares are traded on a regulated market in an EEA State were unable to take advantage of various accounting, auditing and filing exemptions. This reference to an EEA State has changed to refer to the UK, meaning that more companies will now be able to take advantage of the small and medium sized exemptions.
• An exemption from the requirement to prepare consolidated accounts was available to certain UK groups which are part of a larger group with a parent in the EEA. Changing this reference to the UK means that it is likely that a number of UK groups which have previously been exempt because they are part of a larger group in Europe will have to prepare consolidated accounts for the first time.
• Dormant companies and subsidiaries which were eligible for certain exemptions resulting from statutory guarantees given by a parent in an EEA State will now qualify for those exemptions only if the parent is in the UK.
• Changes to accounting frameworks which were permitted for certain companies upon ceasing to be traded on an EU market will now only be available upon ceasing to be traded on a UK market
• Extensions of accounting reference periods which were permitted to certain companies which are part of an EEA group will now only be available with reference to UK groups

With the exception of the final point on extension of accounting reference dates, which has immediate effect, these changes apply for accounting periods commencing on or after 1 January 2021.

Strategic report

The most noticeable effect of Brexit on company accounts will be seen in those companies which do not qualify for small company exemption and are required to produce a strategic report.

Unlike every other section of a company’s accounts, which present information for the period which has passed, the strategic report looks forward.  It is specifically required to address the principal risks and uncertainties faced by the company together with the factors likely to affect its future performance.

Despite the fact that the Brexit transition period has come to an end, the terms “risk” and “uncertainty” are still very much applicable in relation to leaving the EU.  With the changes to the VAT and Customs regimes, the potential for unforeseen currency fluctuations and the restrictions on freedom of movement and freedom of trade, it is difficult to imagine a business which will not be affected.  We have already seen many reports in the media on difficulties being experienced by exporters.  Other, less obvious factors may come into play as time progresses, even for businesses which do not engage in international trade.

Although we have known about Brexit for a number of years, the terms of departure were only agreed very late last year.   This made it difficult to comment in advance on the likely effects on businesses.  Uncertainty remains over the medium to long term impact there will be increasing pressure on company directors to communicate their assessment of how they expect Brexit to affect their business, identifying the key areas of uncertainty and their plans for managing the risks.

Financial reporting standards

There are no new financial reporting requirements which specifically address the UK leaving the EU.  From a financial reporting point of view, the impact of Brexit will derive from its effects on the wider economic environment.  The effects will be very significant for some businesses, less significant for others.  Company directors will need to consider the implications on all aspects of their business.

Key considerations will include:

• The measurement of assets, including tangible assets, intangible assets and stocks. It may be that the recoverable amounts of such assets will be affected.
• Foreign exchange. Brexit may bring about volatility in exchange rates.
• Going concern. Directors will require to consider how the company’s ability to continue to operate as a going concern will have been affected by departure from the EU.

Conclusion

Although Brexit has now happened, it is too early to assess the full impact on business and this is likely to remain the case throughout 2021 and beyond.

With the exception of the legislative changes mentioned above, which are themselves only applicable in a small number of cases, there have been no significant direct changes to company accounts as a result of leaving the EU.  The full effects on the figures shown in accounts and on the narrative aspects of those accounts will become apparent over time as the consequences of Brexit work their way through the economy and society as a whole.

The information in this blog provides only an overview of the guidance and legislation in force at the date of publication and no action should be taken without consulting the detailed  guidance and legislation or seeking professional advice.  Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this blog can be accepted by the firm.