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Article:

The effect of Brexit on interim and annual reports

16 July 2018

Companies generally gave only very limited and generic information on the potential effects of Brexit in the last reporting season. With so much uncertainty about both a transitional and post-Brexit deal between the UK and the EU it was difficult for companies to make meaningful assessments. The Government’s recent White paper [link to BE6] provides some more clarity although it is unlikely to be accepted by the EU in its entirety. 

However, with Brexit only nine months away it is increasingly important for companies to assess whether and how the continuing uncertainty, as well as any provisional or final agreements, might affect their business in the future. This will be vital for the continued success of many businesses and will, in turn, have an effect on the narrative disclosures provided by companies in future interim and annual reports (and potentially even on the financial information itself).

Investors would undoubtedly benefit from companies indicating in their interim reports to what extent they have considered the risks and opportunities associated with Brexit. This might include reference to the company’s reliance or otherwise on European markets and funding or its reliance on, or exposure to, European laws and regulations.

The disclosures might also provide some insight into how the directors are approaching the continuing uncertainty. For example, has a detailed review of supply chains been undertaken and the risk of delay, disruption, additional customs administration and possible tariffs been considered? How are such risks being alleviated? For example, obtaining Authorised Economic Operator (AEO) accreditation, stockpiling inventory and/or obtaining increased bank facilities to cover duty deferment guarantees.

We note that, whilst there is no explicit requirement to include principal risk disclosures in AIM interim reports, companies that are within the scope of the DTR 4.2.7(2) must include a description of the principal risks and uncertainties for the remaining six months of the financial year in their interim report. All companies that are required to prepare a strategic report must include a description of the principal risks and uncertainties that affect the business in their annual reports.

Within the financial information, any uncertainties associated with Brexit may affect the discount rate and cash flow projections that are used in valuation models, impairment calculations and even going concern assessments. Whilst it is clearly impossible to predict what the effect of Brexit will be on the short, medium and long-term prospects of any business, it should be possible to make allowance for the uncertainties that exist. It is important that they are not simply overlooked or ignored.

Read BDO’s Brexit Planning Guide.

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