Reporting implications of Brexit

12 September 2016

We considered the implications of the EU referendum on reporting on risks and uncertainties and also the potential tax effects in our April Business Edge. Since then, the referendum vote has found in favour of the UK leaving the EU, and the Financial Reporting Council (FRC) has issued reminders for half-yearly and annual financial reports.

Following the referendum, there is now a level of uncertainty that may last for several years. Uncertainty impacts assumptions in accounting estimates which affect various areas of financial reporting – fair values, impairment assessments, going concern forecasts and actuarial assessments as well as narrative reporting on principal risks and uncertainties.

Companies and their directors need to be cautious about placing undue emphasis on short term market volatility, which we are already experiencing. However they do need to consider whether or not they think there might be longer term ramifications of Brexit on their business. The impact of the uncertainty will obviously vary depending on the nature of the business and the markets in which it operates: factors such as degree of exposure to export markets, foreign currency suppliers, funding and hedging, overseas subsidiaries, investment properties (location and tenant base), listed investment holdings and defined benefit pension schemes will need to be considered.

Questions that Boards need to be asking themselves include:

  • Do we anticipate a major impact from Brexit, and do our general assumptions about how the business operates and the business model remain valid in the current conditions?
  • Are the narrative disclosures relating to principal risks and uncertainties specific to the entity’s circumstances (not just bland, boilerplate) and do they include details of risk management or mitigation?
  • When looking at forecasts supporting going concern and longer term impairment reviews, what has been/needs to be revised in the light of recent events?
  • What supports the assumptions for foreign exchange rates, interest rates, investment yields, property realisations, and inflation?
  • Are there any significant contract / financing renewals due in the foreseeable future and any indications of a change in attitude?
  • Does the forecast or impairment model enable management to examine the impacts of changes in assumptions and adverse circumstances?
  • Given the general fall in sterling post referendum, have we considered what exchange rate would be appropriate for translating the results of overseas operations rather than using a simple annual average rate?
  • Given the increase in market volatility around foreign exchange, equity markets and gilt yields, what is the effect on financial instruments measured at fair value, provisions, pensions and other liabilities measured at discounted values and other items that may be affected by changes in foreign exchange rates, interest rates or market prices?

Even if a reporting entity’s year-end date was before 23 June 2016 and the subsequent market volatility, it will still be necessary to consider what disclosure is required in respect of any non-adjusting post balance sheet events and whether there are implications on the going concern assumptions.

For further information on this issue please contact Iain Lowson.

See also What Brexit means for data protection laws.

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