What the UK framework for audit and reporting will look like at the end of the transition period.
The government and the Financial Reporting Council (FRC) have published letters to the accounting and audit sectors setting out the UK framework for audit and reporting at the end of the transition period.
These letters provide enhanced guidance to UK incorporated companies, multinational groups with a UK and EEA presence and UK and EEA companies with cross-border listings. It contains links to various resources ie webinars, legislation references where practitioners can find useful information to help their clients.
The UK’s legal framework for accounting and corporate reporting will be effective from 11pm on 31 December 2020.
What has changed?
It is important to note that for most companies the UK’s accounting and corporate reporting regime will remain largely unchanged. However, some of the most obvious changes that practitioners should be aware of are:
All UK incorporated companies that are currently required to use EU-adopted IFRS will need to use UK-adopted international accounting standards for financial years that begin on or after 1 January 2021. On 1 January 2021, UK-adopted international accounting standards and EU-adopted IFRS will be identical.
Companies with financial years ending on 31 December 2020 can continue to use EU-adopted IFRS as it stands at the end of the transition period for the 2020 financial year, and UK-adopted international accounting standards for the next financial year.
Early adoption of UK-adopted international accounting standards is allowed. Where new or amended IFRS are adopted by the UK after the transition period, but before those companies file their accounts for the financial years that straddle the end of the transitionperiod, they can choose to apply any new IFRS adopted by the UK in addition to EU-adopted IFRS as they exist at the end of the transition period. This also applies to companies with financial years ending before the end of the transition period, but who do not file until after the end of the transition period. Where companies choose to make use of this option, they will need to disclose what standards they have used as part of the notes to their financial statements.
Some of the specific changes to the relevant section in Companies Act 2006 for UK companies for financial years that begin on or after 1 January 2021:
S401 – No consolidation is required for intermediate UK parent companies that have an EEA parent using EU-adopted IFRS to produce group accounts.
S394A – The preparation and filing exemptions will no longer be available for dormant subsidiaries of EEA parents. This means that dormant UK registered subsidiaries with an immediate EEA parent will need to prepare and file individual annual accounts with Companies House.
S392 (3) – UK subsidiaries will no longer be permitted routinely to extend the period to align their accounting reference date with their EEA parent.
S479A and S479B – Audit exemption will not be available to UK subsidiaries of EEA parent undertakings after exit day. The subsidiaries audit exemption will continue to be available for those companies and LLPs that are subsidiaries of UK parent undertakings.
What will be the impact on Irish incorporated companies – are they able to use UK GAAP including for listing purposes?
The Financial Reporting Council (FRC) is the accounting standard setter for both Ireland and the UK. As a result, UK GAAP and Irish GAAP are for material purposes the same. This will continue to be the case after 31 December 2020.
Company Law in Ireland requires that companies incorporated in Ireland prepare financial statements for the company either according to ‘Irish GAAP’ or according to EU-adopted IFRS.
For UK incorporated companies or groups with securities admitted to trading on the Irish Stock Exchange or UK incorporated groups that issue debt from a subsidiary incorporated in Ireland the same advice applies as set out above. That is, such companies will need to comply with local regulatory provisions from 1 January 2021 - in this case Irish regulatory provisions. Any companies affected may contact the Irish Financial Services Regulatory Authority and check what requirements will apply.