Technical update: How will Brexit impact UK financial reporting?

1. Small and medium-sized companies and groups

The Companies Act 2006 (CA2006) refers to small companies as those ‘subject to the small companiesʼ regime’. Small companies benefit from several accounting, audit and filing exemptions. For a company to be able to apply this regime, it must:

• qualify as small according to size criteria; and
• not be excluded from the regime

If a company is a parent company, it will only qualify as small if the group it heads qualifies as a small group.

The size criteria for small companies and groups will not be affected by Brexit however there are changes to the exclusions from the small companies’ regime.

Under s.384 CA2006, a company is not entitled to the benefit of the concessions for small companies if at any time during the financial year it was:

• a public company;
• a banking or insurance company and certain other financial services authorised companies; or
• a member of an ineligible group.

An ineligible group is defined as a group in which any of its members, wherever incorporated, is:

• a traded company (a UK company whose shares or securities are traded on an EU regulated market);
• a body corporate (other than a company) whose shares are traded on an EU regulated market;
• a banking or insurance company and certain other financial services authorised companies; or
• a person (other than a small company) who has permission under the Financial Services and Markets Act 2000, Pt. 4 to carry out a regulated activity.

2. Exemption from preparing group accounts

Under CA2006, there are three situations where a parent company is not required to prepare group accounts:

• Small groups (s.399(2A) CA2006);
• Intermediate parent company (s.400/401 CA2006); or
• All subsidiaries may be excluded from consolidation (s.402 CA2006).

S.400 currently provides exemption from preparing group accounts where the company is a subsidiary of a parent established under the law of an EEA state and s.401 provides the same exemption if the parent is established under the law of a non-EEA state i.e. elsewhere in the world.

The two sections are broadly similar and contain a number of conditions including that the UK company and its subsidiaries are included in the consolidated accounts of a higher parent and those consolidated accounts (in English) are filed at Companies House along with the UK company’s accounts.

It should be noted, however, that for the purposes of s.401, the consolidated accounts of a non-UK parent within which the company is included would need to be drawn up:

• in a manner equivalent to those drawn up in accordance with Part 15 of the Companies Act i.e. FRS102 – see note (a);
• in accordance with UK-adopted international accounting standards – see note (b); or
• in accordance with standards which are equivalent to international accounting standards – see note (c).

Notes:

(a) Given that the UK accounting framework (FRS102) has been developed in accordance with the most recent EU accounting directives while the UK was a member of the EU, and there are no plans at present to make any changes, it would be fair to assume that an EU parent’s consolidated accounts prepared under the relevant local accounting standards would be equivalent to the UK framework.

(b) The mechanism for the UK to adopt international accounting standards has not yet been finalised and announced however it is assumed that on 1 January 2021 all current EU-adopted international accounting standards will be adopted in the UK.

(c) In 2007, the EU established a mechanism to determine the equivalence of Generally Accepted Accounting Principles (GAAP) from countries outside the EU. Subsequently the EU identified the following as being equivalent to international accounting standards:

• Japanese GAAP (from 1 January 2009);
• US GAAP (from 1 January 2009);
• Chinese GAAP (from 1 January 2012);
• Canadian GAAP (from 1 January 2012);
• South Korean GAAP (from 1 January 2012); and
• Indian GAAP (from 31 December 2014).

3. Exemption from audit by way of parent company guarantee

Under s.479A CA2006, subsidiary companies may be exempt from the requirement for audit by a parent company providing a guarantee over all outstanding liabilities of the subsidiary at the end of the financial year, subject to a number of conditions. The conditions include the requirement for the parent company providing the guarantee to be established under the law of an EEA state and the company must be included in the consolidated accounts prepared by that parent.

4. Extending an accounting reference period

A company may not extend its accounting period more than once in any five year period unless:

• the company is a subsidiary undertaking or parent undertaking of a UK or other EEA undertaking and is changing its accounting reference date to coincide with that of the other undertaking;
• the company is in administration under the Insolvency Act 1986, Pt. 2 or the Insolvency (Northern Ireland) Order 1989, Pt. 3; or
• the Secretary of State directs, which he may do with respect to a notice that has been given or that may be given.

5. Dormant company exemption from preparing accounts

S.394A CA2006 contains an exemption from the requirement to prepare and file individual accounts applicable to certain dormant companies that are subsidiary companies. The use of this exemption is subject to a number of conditions, primarily the requirement for the parent company, which must be registered in the EEA, to guarantee the liabilities of the dormant subsidiary company until they are settled or expire.

6. Change of accounting framework

Under s.395 CA2006 a company may choose to prepare its accounts either:

• in accordance with s.396 (“Companies Act accounts”); or
• in accordance with international accounting standard (“IAS accounts”)

One of the further conditions of s.395 is that after a company has prepared IAS individual accounts (i.e. in accordance with the full suite of international standards adopted by the EU) it may not switch back to Companies Act accounts more than once in a five year period other than for a relevant change of circumstances. Those circumstances include ceasing to be either a company with securities traded on an EU regulated market, or a subsidiary of a parent whose securities are traded on an EU regulated market.

Note that accounts prepared under FRS101 follow the recognition and measurement requirements of international standards but take advantage of certain disclosure exemptions. For statutory purposes these are “Companies Act accounts” and therefore the restrictions of s.395 do not apply.