BREXIT

IMPLICATIONS

A concise summary of the

accounting, reporting and
auditing implications

Please note that this publication is for

internal use only
BREXIT IMPLICATIONS
Accounting and reporting implications

INTRODUCTION
On the 31 January 2020 the UK left the European Union (the ‘EU’). Throughout the remainder of 2020 the
UK was in a Transition Period; it was no longer a member of the EU but was still subject to the EU rules,
remaining a member of the customs union.
We have now passed the end of the Transition Period and a deal has been struck between the UK and EU.
It is therefore now time to consider the practical challenge of dealing with the real consequences of the
exit from the EU. The UK-EU trade agreement, which contains new rules for living, working and trading
together, took effect from 11pm GMT on 31 December 2020. This guide does not contain all the terms of
the deal, but focuses on audit and financial reporting matters that could affect your audited entities.

MOVING FORWARD
The full agreement is a lengthy document at over 1,200 pages long, and has implications in a range of far
reaching areas. Some of the most widely reported items include:
 There will be no taxes (tariffs) on goods
 No limitations have been placed on trade
 Businesses offering services, such as banking, architecture and accounting, will lose their automatic
right of access to EU markets and will face some restrictions
 Recognition of some professional qualifications will also be affected
 There will be significant impacts in the areas of Travel, Fishing, Security and Data and Education
 The European Court of Justice (the highest court in the EU) will also cease to have general jurisdiction
over the UK
In addition to these headline items, there are other changes that have financial reporting and/or audit
implications, and this is the focus of this guide.

In summary, just like the COVID-19 pandemic, the impact of Brexit could be pervasive but will affect
different companies in different ways. Companies need to assess the effect of this on their particular
circumstances as a matter of priority. It is worth highlighting that:

 The 11pm GMT timing of the end of the Transition Period means that this will be an in-year event for
companies with a 31 December year-end
 Some of the regulatory changes are complex and may result in questions that do not have a clear and
simple answer and which might take time to resolve. These factors increase the risk of errors being
made in accounting or application of the law. They also increase estimation uncertainty
 The reporting of Brexit related matters will need to be carefully explained. This will be an FRC focus
area and it will be paying attention to the quality of the disclosures made as part of their reviews

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BREXIT IMPLICATIONS
Accounting and reporting implications

CONTENT
This guide is split into four main areas:
 Laws and regulations
 Narrative and disclosure
 Recognition and measurement
 Audit considerations

These boxes highlight key points or provide additional explanation.

These boxes show relevant audit tips.

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LAWS AND REGULATIONS
The impact of changes to the UK reporting framework

TIMING OF BREXIT
The end of the Brexit Transition Period was at 11pm GMT on 31 December 2020. This means that it is an in-
year event for companies with a 31 December 2020 year end, not a post balance sheet event. Some
changes apply immediately, whereas others apply from periods beginning 1 January 2021.
As a consequence, any changes that are brought about by the end of the Transition Period may affect the
company in the current financial year; they are not necessarily things that can be dealt with in the period
ended 31 December 2021.
The most stark example of where this may be is taxation, which is addressed later on. In addition there
are also potential issues that will affect the accounting standards that can be applied, what exemptions
and reliefs can be taken, and the law applied, by 31 December 2020 year end companies.

THE IMPACT ON ACCOUNTING STANDARDS

There will be no effect on companies that use UK GAAP as their accounting framework, but the aspects of
the Companies Act that refer to IFRS are profoundly changed.
Whilst we were in the Transition Period the UK was still bound to the EU endorsement process for IFRSs.
Under this system, the EU endorsement of an IFRS would make that standard available for use in a set of
IFRS accounts, irrespective of when its balance sheet date fell.

For example: A company has a March 2020 year end. It applied EU-IFRSs and could have used any
IFRSs that were endorsed for use in the EU after its balance sheet date up until the accounts were
approved in late 2020.
After 23:00 on 31 December 2020

Following the end of the Transition Period, the UK no longer recognises EU endorsements.
Under the Companies Act, companies whose accounting periods begin on or before 31 December 2020 but
which were not signed off by the end of 2020 (ie those companies whose year end straddles the end of the
Transition Period) must apply EU endorsed IFRSs as if it was frozen as at 11pm GMT on 31 December 2020.
This means that companies could potentially be disadvantaged as they cannot use IFRSs that are endorsed
by the EU in 2021. To address this the Companies Act has been amended to allow companies to use any
IFRSs that are endorsed by the new UK endorsement mechanism after the end of the Transition Period as
well as EU endorsed IFRSs as at 11pm GMT on 31 December 2020.

A new UK endorsement board has been set up, the UK Endorsement Board (UKEB)
and they will endorse all the new UK-IFRSs from now on

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LAWS AND REGULATIONS
The impact of changes to the UK reporting framework

THE IMPACT ON ACCOUNTING STANDARDS (CONTINUED)

This doesn’t completely resolve the potential problem, however, because the UK endorsement process may
run faster or slower than the EU endorsement process, and it could come to a different decision. This could
lead to a mismatch between EU-IFRSs and UK-IFRSs.
Furthermore, if the company has a listing on an EU market and there is divergence in the two endorsement
processes, then the accounts prepared under UK-IFRS might not meet the EU market’s listing requirements.

However, companies whose accounting period began before the end of the
transition period and who have to comply with the FCA’s Disclosure Guidance and
Transparency rules (‘DTR’s) will still have to prepare accounts under EU-IFRS.

The requirements state that they have to be prepared in accordance with

‘international financial reporting standards as adopted from time to time by the
European Commission, in accordance with Regulation (EC)No 1606/2002 as it
applied in the European Union’. This includes any standards, interpretations and
amendments to standards adopted by the European Commission after 31 December
2020.

The FRC has issued guidance on this for companies preparing IAS accounts with accounting periods
straddling the end of the Transition Period, including guidance for those who have to comply with the
FCA’s DTR requirements.

ACCOUNTING PERIODS THAT BEGIN AFTER 11PM ON 31 DECEMBER 2020

Companies whose annual accounting period starts after 11pm GMT on 31 December 2020 (ie periods
beginning on or after 1 January 2021) and prepare their accounts under IFRS, must apply UK-endorsed IFRSs
only. The potential issues arising from any future divergence from EU-IFRSs will apply to them also.

BASIS OF PREPARATION NOTE DISCLOSURE

Companies may need to update the content of this note to explain the accounting framework applied at
the year end.

Audit insite will be updated to include some example wording or the basis of
preparation

Audit Tips
• Have conversations early on about the immediate changes such as the basis of
preparation that will need to be made to the financial statements
• Check the audit report and responsibilities statement refers to the correct
accounting framework

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LAWS AND REGULATIONS
Companies with shares or debt listed on an EU regulated market

IFRS COMPANIES
Where UK companies have shares or debt listed on an EU-regulated market, care will need to be taken to
ensure that the accounting framework applied is appropriate for the market on which the securities are
listed – companies are advised to check the requirements of the relevant EU Competent Authority.
As noted in the previous section, it is possible that differences between the EU and UK endorsement
processes mean that the accounting adopted under UK-IFRSs is different to the accounting under EU-
endorsed IFRSs. The worst case scenario for this would be that such companies would have to prepare a
second set of EU-IFRS accounts for the purposes of their European regulatory filings.
This will continue to be a risk unless until UK-endorsed IFRSs are granted official “equivalence” by the EU.

What is equivalence? Equivalence is a unilateral, non-reciprocal, designation by the

EU of a third country as having a sufficiently similar level of regulation for particular
activities or services – in this case accounting standards framework and endorsement
processes

UK GAAP COMPANIES
The UK is not seeking equivalence of UK GAAP with domestic GAAPs used in the EEA. It is therefore likely
that companies that are currently permitted to use UK GAAP to list securities in the EEA will need to
prepare an additional set of accounts that comply with relevant listing requirements.
This requirement is likely to have an immediate effect, meaning that UK GAAP may not be a permissible
framework for EEA listing purposes, even where the financial statements cover financial years that began
before 1 January 2021.

IMPACT ON THE USE OF DTR

UK companies that have a listing on an EU-regulated market are likely to have applied the Disclosure
Guidance and Transparency Rules (the DTR) by virtue of the UK be considered the company’s Home State.
This will no longer be possible after 31 December 2020 and, instead, companies will be required to apply
the equivalent legislation in the country of listing. These requirements will be similar to those that are
included in the DTR but they will not necessarily be identical and companies will need to understand the
requirements.
The DTR would continue to apply to UK companies listed on the London Stock Exchange.

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LAWS AND REGULATIONS
Regulatory issues for periods beginning on or after 1 January 2021

EXEMPTION FROM CONSOLIDATION FOR INTERMEDIATE UK PARENTS

Previously UK-incorporated intermediate parent company’s have been able to take an exemption from
consolidation under s400 of the Companies Act where the sub-group is included in the consolidated
accounts of an ‘EEA’ parent and certain conditions are complied with. Following the exit from the EU, s400
has been updated and ‘EEA’ parent is now ‘UK’ parent. This means that s400 will only be available if the
parent is a UK company.
Where the parent is not a UK company, the intermediate parent company would need to look to s401 for
this consolidation exemption instead. The wording of this has been updated; where it previously referred
to ‘non-EEA’ parents it now refers to ‘non-UK’.
The application of s401 is allowed where the parent company uses an accounting framework which is
considered to be ‘equivalent’ to those allowed under the Companies Act. The UK has already granted EU-
IFRSs the necessary “equivalence” badge and so this exemption will be available where consolidated
accounts are prepared using EU-IFRSs.
Where other GAAPs are used, for example US GAAP, companies should refer to the guidance of FRS 100 to
determine equivalence. At the end of the transition period all the GAAPs currently considered to be
equivalent will still be considered as such, but this may need to be carefully considered each year as laws
and GAAPs change over time.

OTHER EXEMPTIONS ALTERED WHERE COMPANY HAS A EUROPEAN PARENT

Similarly, other exemptions available within the Companies Act will fall away for periods beginning on or
after 1 January 2021 if the parent company that the UK company was relying on for the exemption was an
EU company. These include:
 The exemption from the need for Large PIE subsidiaries to prepare non-financial reporting statement
(s414CB)
 The ability for companies to extend their accounting reference period more than once every five years
(s392)
 Audit exemptions for subsidiaries benefitting from a parent company guarantee (s479A)
 Dormant subsidiaries filing exemption – where the immediate parent company is not a UK incorporated
company they will have to prepare and file accounts again for periods beginning on or after 1 January
2021 (s394A)

Companies incorporated in Europe may also be facing similar challenges and the
company should refer to local legislation for equivalent effects on EEA incorporated
companies

Audit Tips
Where the audited entity is a group with overseas subsidiaries you have factored in
the work and that the budget and fees reflect the additional work that might be
needed

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LAWS AND REGULATIONS
Managing the additional risks

The scale and potential complexity of the changes in legislation and regulation that will come into force on
and after the end of the Transition Period is significant. To reduce the risk of error or omissions, it is
imperative we:

 Leave time – The complexity of the changes, and the way they have been implemented,
means that it is unlikely that there will be a clear and easy answer to a simple question
arising on deadline day. Consider what might have changed as a result of the end of the
Transition Period early in the audit process.
 Confirm any exemptions taken – If a company is claiming any exemption from a
requirement in company law or regulation that references the location of another group
entity or the accounting framework that another set of accounts are prepared under,
double check it remains available.
 Use the right people – Understanding and applying the changes to laws and regulations
can be difficult, and so a consideration of the issues that arise for an audited entity
should be undertaken by the more experienced members of the team.
 Don’t forget the subsidiaries - As many of the changes affect subsidiaries
disproportionately it’s really important that we continue to focus on the implications for
them, even after the group accounts have been signed.

Audit Tips
• Engagement of the audited entity – we have hopefully been having conversations
for some time particularly about Brexit but it is crucial that they now consider both
Brexit and COVID together and their effects on the financial statements. These
cannot be considered as an ‘after thought’ or ‘add on’.
• For December 2020 year ends Brexit is an In year event – ensure audited entities
are aware of this – particularly in relation to the technicalities relating to the date
we leave the EU (11pm GMT on 31 December 2020).
• If your audited entity is a Public Interest Entity (PIE) we are required to report
promptly to the regulator any information concerning that PIE of which we have
become aware of while carrying out the audit which includes any material breach
of laws and regulations.

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NARRATIVE AND DISCLOSURE
The impact on narrative reporting

NARRATIVE REPORTING
All companies should consider how any uncertainty or known implications of leaving the EU affects their
principal risks and uncertainties, going concern and, for businesses that prepare them, viability
statements.
The directors’ report and strategic report are an opportunity to communicate how the board is taking
account of the challenges – and opportunities - of Brexit. The message from regulators is consistent: they
are looking for clear, transparent and entity-specific information in the annual report. The relationship
between the business, government, wider society - and how boards navigate their way through the
disruption caused by this major economic event - will be under significant scrutiny.
Brexit has the potential to impact aspects of an entity’s narrative reporting in many different ways which
could include the disruption to business models, changes to risk profiles and stakeholder relationships, as
well as operational and financial performance.
Readers are likely to find disclosures more useful where a clear distinction is drawn between the specific,
direct challenges to the business model and operations and the effects of broader economic uncertainties.
Questions that might help the consideration of what effect Brexit has had on an entity's risk management
and profile, and consequently on its wider narrative reporting include:
 The disruption to business models and strategy - Has Brexit had a substantial direct or indirect effect on
the company? What are those effects? Are they short-term effects or long-term?
 Changes in the risk profile - Is Brexit seen as an event whose potential impact is pervasive across
existing principal risks, or is it a new principal risk in its own right?
 Mitigating actions - What is being done, or will be done, to address the principal effects by management
and the board? What actions has the board undertaken during the year to assess the immediate and on-
going effects of Brexit in relation to its role in governance and setting strategy?
 Stakeholder engagement - Has the board engaged with stakeholders and had regard to their interests in
making decisions in relation to Brexit?
 Longer term impact - Has the board considered the long-term effect of decisions around how to
navigate Brexit?

The ICAEW noted in “Practical help for Preparers” that the narrative parts of the
financial statements are likely to be subject to as much scrutiny as the numbers
this year and companies need to devote more time to writing their narrative
disclosures.

The FRC announced that Brexit implications and assumptions will be considered as
part of their focus of their 2021 thematic review on going concern an viability
disclosures.

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NARRATIVE AND DISCLOSURE
The impact on narrative reporting

NARRATIVE REPORTING (CONTINUED)

Addressing the questions raised is likely to touch many different parts of a company’s narrative reporting.

Market trends and Principal and

Strategy Business model
factors emerging risks

Stakeholder
relationships (eg
Going concern and Section 172 Corporate
employees,
viability statements governance
suppliers,
customers)

The better disclosures will maintain consistency between each different area, and will tell one story. For
example; the disclosures on risks should be consistent with the going concern/viability statement
assessment and disclosures. These in turn should be consistent with the company’s strategic priorities.
Likewise, the messaging on the impact of Brexit should be consistent with assumptions and inputs that have
been used to calculate the estimated future cash flows used in the preparation of the financial statements.

Not all companies will be adversely affected by Brexit, some might be relatively
unaffected and others may have significant opportunities. Where this is the case
the impact of Brexit should still be addressed in the narrative which should explain
the company’s position clearly and concisely

Companies should consider how Brexit might affect their key stakeholders too as
there could be a secondary effect on them if their stakeholders are affected. For
example a company affected by Brexit and may experience a reduction in sales
revenue, which in turn may alter how they transact with their suppliers. The
effect on key stakeholders may form part of an entity’s s172 considerations.

Audit Tips
• Auditing the narrative reporting sections is not something that can be left to the
last minute - ensure this is budgeted in to our timetable. We also need to ensure
that the audited entity is aware of when in the process we need to consider this
content to ensure we can audit properly
• Consider carefully where entities might want to use the combination of Brexit
and COVID -19 to exhibit ‘excessive prudence’ and bury bad news.

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NARRATIVE AND DISCLOSURE
The notes to the financial statements

FINANCIAL STATEMENT DISCLOSURE AREAS AFFECTED

The potential impact of Brexit doesn’t stop with the narrative reporting disclosures, and some financial
statement disclosures will also be affected.

Financial risks (eg

Basis of Critical judgments Post balance
liquidity, credit
preparation and estimates sheet events
and market)

Companies may need to update their basis of preparation to clarify which accounting standards have been
applied – the FRC has issued guidance on the appropriate wording depending on the circumstances.
Where an intermediate parent takes the exemption from consolidation and they have
a ‘non-UK’ parent they will need to refer to the correct section of the Companies Act
for p/b 1 January 2021 ie s401 rather than s400

Likewise Brexit may have led to events and circumstances that have had a significant effect on estimates
and judgments. Uncertainty and volatility might have the effect of increasing the breadth of reasonably
possible ranges of outcomes for estimates or change circumstances that have formed the basis for certain
accounting judgments.
A further area of disclosure that is often unchanged from year to year is the financial instruments’ risks
disclosure on liquidity, credit and market risk. These disclosures might need to change substantially in the
current climate. Liquidity risk in particular will need to be consistent with the assumptions and logic used
in going concern and viability disclosures – this is highlighted very clearly in the latest thematic from the
FRC on Cash flows and liquidity disclosures.
Stakeholders want to be given up to date information which looks beyond the
balance sheet date and considers the impact over the short, medium and longer
term

Companies with a year end of November 2020 or earlier will have the additional
uncertainty of whether a deal would or would not be struck

Finally, there is a requirement under IAS 10.21 to disclose material, non-adjusting events after the
reporting period. This includes giving a description of the nature of the event and an estimate of its
financial effect, or a statement that this cannot be made. Many companies with year ends prior to the end
of the Transition Date will still need to assess the effects of Brexit to comply with this disclosure
requirement. Likewise companies with a 31 December year end may have PBSE’s that have arisen as an
indirect result of Brexit, for example delays at the ports.

Audit Tips
• For December 2020 year Brexit and COVID are considered in year events so take
this in to account when considering subsequent events
• We have to consider PBSEs up to the date of audit sign off – even when sign off is
delayed

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RECOGNITION AND MEASUREMENT
The notes to the financial statements

The effects of leaving the EU vary between companies. The content that follows is a summary of possible
recognition and measurement issues to consider and is not intended to be an exhaustive list.

IMPAIRMENTS OF GOODWILL AND OTHER NON-FINANCIAL ASSETS

Brexit may have a negative effect on cash flows and could trigger more impairment tests than in previous
years. Specific points to highlight in this area include:
 If undertaken prior to 31 December 2020, the annual impairment test of goodwill or indefinite life
intangibles may need to be updated at the year end now the outcome of the trade deal with the EU is
known. This means forecasts and budgets from earlier dates should be updated to the balance sheet
date in the calculation of the recoverable amount.
 There may be significant increased uncertainty in reliable forecasts to calculate both value in use (VIU)
and fair value less costs to sell (FVLCTS).
 Despite the fact that the uncertainty as to whether we have a deal has been resolved, the financial
impacts of the deal may not necessarily be immediately clear. Greater focus will be placed on the
already important disclosures of assumptions, sensitivities and ranges of possible outcomes under IAS 1
and IAS 36.
 Ranges of potential outcomes considering the best and worst case scenarios may widen or narrow as the
impact of the new trade agreements becomes clearer.
 It may be appropriate to factor in the use of multiple probability-weighted scenarios when assessing
increased risk and uncertainty. This is similar to the judgments made for COVID-19 as illustrated in the
BDO IFRS in practice 2020-21 for IAS 36 (section 9.8).
 If models change to reflect variations in expected future cash-flows, the discount rate might also need
to be updated to avoid any double-counting.
 Additional volatility in exchange rates could affect the recoverable amount calculations.
 The ultimate Brexit scenario negotiated (e.g. the final deal that was agreed upon) may cause
amendments to leases, third party arrangements, restructurings or redundancies, which may also impact
VIU models. However, remember that restructurings are only factored in once committed and a
provision has been recognised.

Remember that where market cap falls below NAV this is an impairment test trigger
under IAS 36

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RECOGNITION AND MEASUREMENT
A summary of things to consider

FINANCIAL ASSETS UNDER IFRS 9

Brexit is likely to affect the ECL provisions of many companies. This is relevant for debt instruments
classified at amortised cost or at fair value through other comprehensive income, trade receivables,
contract assets and lease receivables, as well as certain issued loan commitments and financial guarantee
contracts.
Brexit-related uncertainty could affect both credit risk and the amount of loss expected. The credit risk for
some entities (in particular those that rely on trade with Europe) may increase as a result of Brexit. For
example, the additional procedures that entities need to put in place in order to comply with new customs
requirements may be costly and could lead to trade disruption if not completed on time. This could have a
detrimental impact an entity’s business which could lead to a consequential increase in their credit risk. In
addition, future trading arrangements for the entities in the service sector remain unclear.
The amount of loss suffered in an event of default may also be affected. For example, if the housing
market is negatively affected by increased economic uncertainty and reduced economic growth, the value
of residential and commercial property that may serve as collateral for a loan may reduce, which would in
turn impact the amount of loss expected.
Entities should note the following:
 Forward-looking information (including macro-economic information) must be incorporated both when
assessing for changes in credit risk (relevant for the general approach only) and when measuring the
amount of loss expected (relevant for the general and simplified approaches)
 It will generally not be sufficient to incorporate only one Brexit scenario because the measurement of
ECL should be a probability weighted measure of credit losses. Despite the fact that a Brexit deal has
been agreed for some sectors of the economy, some uncertainties are likely to remain as entities
embark on their new trading relationships. Furthermore, future trading arrangements for the service
sector remain unknown. For example, even if a worst case scenario has only a small probability of
occurring it could result in very significant losses. This must be included in the ECL calculation in order
to arrive at a probability weighted measure of credit losses
 Reliance on historical performance and the use of historical data may also not be that appropriate/
reliable if Brexit has had/or is expect to have a significant impact on the business model
 Given the inherent uncertainty in predicting the future implications of various Brexit scenarios, entities
should pay particular attention to ensuring that appropriate entity specific disclosures in accordance
with IFRS 7 are included in their financial statements. In addition, consideration should be given to the
implications for significant estimates and judgments under IAS 1.
Entities will need to exercise their judgment in determining whether post year end developments are
considered to be adjusting or non-adjusting events in accordance with IAS 10.
The topic of Brexit and ECL was considered in more detail in a Business Edge article published in January
2019. While the circumstances have moved on, the uncertainty remains and the principles are equally
relevant today.
In addition, the IFRS 9 ECL challenges presented by Brexit are similar in nature to those presented by
COVID-19. As such it may be useful to refer to the following publications:
IFR bulletin: 2020/09 - Impairment Implications of COVID-19 (IFRS 9).
COVID-19 FAQ: FI - impairment - interaction between non-adjusting post balance sheet events and expected
credit losses and the BDO Global IFRB.
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RECOGNITION AND MEASUREMENT
A summary of things to consider

FINANCIAL ASSETS UNDER IFRS 9 (CONTINUED)

In addition, the IFRS 9 ECL challenges presented by Brexit are similar in nature to those presented by
COVID-19. As such it may be useful to refer to the following publications:
IFR bulletin: 2020/09 - Impairment Implications of COVID-19 (IFRS 9).
IFR bulletin 2020/07 - Impairment Implications of COVID-19 (IAS 36).
COVID-19 FAQ: FI - impairment - interaction between non-adjusting post balance sheet events and expected
credit losses and the BDO Global IFRB.

FRS 102 implications (section 11/12) are less complex because UK GAAP retains an
incurred loss model. However, entities will need to carefully consider whether there
is evidence of incurred loss triggers and judgment will always be involved when it
comes to measurement of the provision as it still involves estimating expected cash
flows.

VALUATIONS OF FINANCIAL INSTRUMENTS

All financial instruments measured at fair value may be affected by increased market volatility, which
could increase as a result of the uncertainty surrounding Brexit:
 Increased market volatility could be particularly challenging for level 3 valuations, which require
complex valuation techniques and significant amounts of estimation
 The credit risk of some entities may be affected and, consequently, the fair value of certain investments
could change significantly
 Entities reporting under IFRSs should consider the implications for IFRS 13 disclosures as well as the
implications on significant estimates and judgements under IAS 1.

Audit Tips
If you are using experts then be mindful of the fact that their reports may include
limitations in scope or disclaimers. Consider early in the audit what this will mean for
our approach.

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RECOGNITION AND MEASUREMENT
A summary of things to consider

HEDGE ACCOUNTING
Entities applying IFRSs can apply either the IFRS 9 or IAS 39 hedge accounting requirements as an
accounting policy choice. Irrespective of which accounting policy is chosen, the uncertainty caused by
Brexit may have implications for existing hedge relationships.
 A formerly highly probable forecast transaction may no longer be considered so likely to occur. For
example, an entity may have entered into a hedge for the purchase of a piece of machinery based on
expected production. It is possible that, as a result of Brexit related uncertainty, production forecasts
reduce and that the purchase no longer meets the highly probable criterion. In such cases, the hedge
relationship must be discontinued and, depending on whether or not the transaction is still expected to
occur, amounts accumulated in the cash flow hedge reserve may need to be immediately reclassified to
profit or loss.
 A change in the timing of a forecast transaction can result in ineffectiveness and, in some cases,
discontinuation. Following on from the example above, and assuming the purchase continues to meet
the highly probable criterion, the reduction in production forecasts may result in the timing of the
purchase being delayed.
 The volume of a group of highly probable forecast purchases or sales may be reduced. In such cases,
either partial or full discontinuation of the hedge relationship is required depending on whether the
entity is applying IFRS 9 or IAS 39.
 A change in the credit risk associated with the derivative that is designated as the hedging instrument
can result in additional ineffectiveness and in some cases discontinuation.

Most of the issues noted within the bullets are equally relevant under FRS 102 but,
on the final point, be extra careful under FRS 102 as the legacy interpretations about
own credit risk and whether it should be included in the fair value could alter the
accounting. Always consult if you are not sure.

COVID-19 has brought about similar challenges from a hedge accounting perspective. For a more detailed
accounting analysis relating to highly probable forecast transactions that are no longer highly probable or
reduced in value, refer to the following COVID-19 FAQs:
FI - hedge accounting - single hedged forecast transaction no longer considered “highly probable”
FI - hedge accounting - expectations for hedged sales (or purchase) transactions now reduced

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RECOGNITION AND MEASUREMENT
A summary of things to consider

INVESTMENT PROPERTY AND PPE AT FAIR VALUE

 Brexit could lead to greater volatility in property values, which may result in carrying amounts being
materially different to their fair values. This volatility may trigger a requirement for a revaluation of
non-current assets held at fair value at the balance sheet date.

INVENTORIES
 Inventories may need to be written down to their net realisable value (NRV), if this falls below cost.

REVENUE
 The potential for longer transit times increases the focus on when control passes and the associated
risks of misstatement.
 Where Brexit is expected to affect sales volumes, variable consideration may be affected. The
increased uncertainty may in particular have an effect on the operation of the variable consideration
constraint in IFRS 15. The same applies to purchases of inventory subject to volume rebates.

GRANTS
 For some entities, it is possible that EU grants will become repayable, or no longer claimable, following
Brexit. If a grant becomes repayable it should be treated as a change in estimate. For unsettled grants,
teams should consider whether the grant income will still be received.

PROVISIONS
Brexit could lead to a requirement for additional provisions to be recognised at the year end, for example:
 Companies that are particularly affected may be looking to restructure their operations in the light of
Brexit. A restructuring provision is accounted for only when entities become committed to the
restructuring via a formal plan and having raised valid expectations in those affected by it.
 Brexit will increase many entities’ compliance risks in such areas as employment, exporting and cross
border regulated services. Where there is non-compliance at a period end, a provision may be required
for fines. Alternatively the company might need to disclose a contingent liability.
 Where Brexit has hampered an entity’s business, it may result in some of its contracts becoming
onerous, which may result in a provision.

Don’t forget leases accounted for under IFRS 16 are now considered under
impairment requirements of IAS 36, not under IAS 37 for onerous provisions.

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RECOGNITION AND MEASUREMENT
A summary of things to consider

TAXATION

This is a complex area and companies should obtain specialist tax advice on the
implications of Brexit for their particular circumstances.

The act of leaving the EU is a change in tax status, which is accounted for under SIC-25 ‘Income taxes –
changes in the tax status of an entity or its shareholders’. The currently accepted position is that the UK
ceasing to be subject to the EU rules is the point at there is a change in the tax status of entities that are
currently subject to EU law. As such, the impact of Brexit is recognised at the end of the Transition Period
– being 11pm GMT on 31 December 2020.
For an entity with a 31 December 2020 year end, any change in an entity’s tax status as a result of Brexit
would, therefore, be accounted for as an in-year event. Examples of possible tax events are summarised
below; note that it is not an exhaustive list:
 A deferred tax liability may need to be recognised on unremitted earnings from subsidiaries or branches
in the EU under IAS 12.30-40. In countries where the rate is 0% there won’t be deferred tax to recognise
but for other countries there may be a deferred tax issue. Entities will need to speak to their tax
advisers to understand the position for their individual circumstances.
 Tax charges that are deferred or exempted for transfers of assets within the EU may become payable
once the UK leaves the EU, for example de-grouping charges.
 There may also be implications for state aid, transferability of losses and group reliefs.
 The commercial effects of Brexit would need to be taken into account when determining the
recoverability of deferred tax assets.
 Some of these areas may be subject to uncertainty of treatment at the period end, in which case IFRIC
23 should be considered for IFRS preparers.

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RECOGNITION AND MEASUREMENT
A summary of things to consider

OTHER AREAS TO CONSIDER

In addition to the areas noted above, there are numerous other accounting areas that might be indirectly
affected by Brexit. The list below is not exhaustive, and each company will need to consider their own
unique circumstances when assessing the impact of this change:
 Distributable profits and dividends – The impact of Brexit will need to be assessed at the earlier of the
point dividends are paid or become legally binding (ie they are declared). Directors will need to
consider whether they can lawfully pay dividends (eg under rules on distributable profits and capital
maintenance). The law can be complex.
 Foreign exchange – It is possible that foreign exchange rates will be more volatile, and companies with
foreign currency transactions may experience larger forex movements on monetary assets and
liabilities. Using an average may no longer be appropriate.
 Funding and covenants – Brexit may alter a company’s access to funding, or its ability to comply with
previously agreed covenants. Companies might need to be proactive in managing the impact of Brexit
on these areas.
 Defined benefit pension schemes – The value of the assets in defined benefit schemes might be sensitive
to the movements in the markets, affecting the net asset or liability position.
 Share-based payment arrangements, LTIPs and similar schemes – If the effect of Brexit on the operations
of the company is anticipated to be significant, then this in turn might impact any unvested share
options that have performance related conditions.

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AUDIT CONSIDERATIONS
AREAS TO CONSIDER WHEN AUDITING DECEMBER 2020 YEAR ENDS
The audit of December 2020 year ends would have been challenging anyway dealing with the in year event
of Brexit, particularly given the lack of resolution of the situation has left much uncertainty for companies.
This has been compounded by COVID-19 which has caused an economic shock to business around the world
during the year. The following areas should be considered carefully both when preparing to audit, and
auditing, this difficult period.
RISK
 Spend time thinking about the actual specifics of each SRMM and what assertions are affected. The risk
is not going to be Brexit or COVID – 19 per se – it will be how the event then manifests itself in relation
to the specifics of the audited entity. This needs to be clear to then allow a tailored strategy of
response to be created.
 These are compounded risks – it is not going to be realistic to consider either in isolation or either as an
add on.
 Be careful of entities using the combination of Brexit and COVID to ‘bury bad news’ with excessive
prudence – if there are other underlying issues that need to be clearly disclosed to give a true and fair
view of the state of the entity it would not be appropriate to lump all issues occurring during the year in
to a pot ‘due to Brexit and COVID’.
 Where the entity describes a judgment themselves as ‘critical’ we should respond and ensure we
consider these key audit judgments. Conversely if we find other judgments that we consider should be
assessed by the entity as critical and they aren’t, we will need to consider what more we want the
entity to do in these areas.
 Fraud considerations in relation to the audit need to be detailed and specific and are particularly key
during this period. We need to be able to write the paragraph in audit report about how the audit was
capable of detecting irregularities including fraud. The FRC in their December guidance gave some
suggestions as to areas where the new ways of working at audited entities might result in less effective
preventative and detective controls and should be considered as part of our fraud risk assessment:
– Key staff absent due to illness
– Increased pressures to meet financial targets
– Challenges to keep the business operational
– Management and TCWG focussing on operational issues with less attention to fraud risks
– Eagerness to enter into transactions with reduced checks over counterparties
– Reduced security over physical assets
– Improper claims for financial support, such as mistakenly or deliberately claiming furlough
payments for employees who are actually working.

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AUDIT CONSIDERATIONS
FORECASTS MADE BY MANAGEMENT
 The final Brexit deal is now known however there are still uncertainties surrounding its financial impact
in the short-, medium- and long-term - uncertainties needs to be taken in to account.
 Forecasts cannot be made in isolation and need to include the effects of both Brexit and COVID.
 Where possible use external information and benchmarking with other similar entities to add weight to
our challenge of management and conclusions – ensure this is documented on the audit file.
 Ensure we consider carefully the planned disclosures of assumptions and sensitivities – has the company
modelled a number of different scenarios? The FRC commented in their thematic review released in
November that it liked the use of stress testing and presenting a worst case scenario as this enabled the
anchoring of the other scenarios including the one described as most plausible by the entity. Given the
amount of uncertainty present in the external environment at present it may be appropriate to include
more sensitivities in to the forecasting.
 Consider the underlying data and how it was prepared – can we use Rainbow to check the underlying
integrity of the spreadsheet?

AUDIT REPORTS AND THE FINANCIAL STATEMENTS

 We do not intend to include boilerplate Emphasis Of Matter paragraphs in the audit report on Brexit or
COVID – if they are needed they will be due to the specific facts and circumstances relating to the
entity.
 When documenting Key Audit Matters it is important to note that Brexit and COVID are not the risks. We
need to consider how these manifest themselves in relation to the individual circumstances of the
entity.
 In relation to the other information in the front of the financial statements we would expect the entity
to incorporate Brexit and COVID throughout their considerations – principle risks etc. It would not be
appropriate to just add in a ‘by the way’ paragraph at the end.
 Remember the key message - do not treat them separately – they are a compound issue.
 There will continue to be a need for us to reassess key aspects of our audit and we will need to do right
up to the point of signing our auditor’s report. This may require the provision of further evidence and
information by management.

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AUDIT CONSIDERATIONS
GOING CONCERN
 Audited entities should be taking Brexit fully in to account in relation to all of their forecasting and
assumptions
 In relation to audit we need to follow the policies and procedures in relation to going concern:
• Complete the red flags checklist at planning – then consider the red flags raised
• Use the consultation memo to document these considerations and then discuss the risks and your
planned responses with TSG
• TSG may suggest involvement or BR or in certain circumstances a panel to consider the issues
• Document clearly on file using the consultation memo and COVID 19 memo
• Where you are including a modified report – TSG Audit Reporting will review
• Where you are AQR in scope – you will need to have a conversation with Scott Knight about your
conclusions – ensure this is documented on file
• Non AQR in scope entities can speak to the Audit Executive if they consider if would be helpful.
 Using Rainbow can be useful to help with integrity of managements forecasts – remember they need to
provide a forecast for at least 12 months from the approval date and if they don’t – this can have
implication for our audit report.
 Where key financing renewals take place for example 14 months after the audit report date it will mean
management need to include these in their forecasts and extend this period which means our audit work
should also reflect this period and the disclosures in the financial statements should clearly state the
period length.
 In relation to management forecasts
• These forecasts cannot be made in isolation and need to include the effects of both COVID and
Brexit
• Where possible use external information and benchmarking with other similar entities to add
weight to our challenge of management and conclusions – ensure this is documented on the audit
file
• Ensure we consider carefully the planned disclosures of assumptions and sensitivities – do we need
more scenarios? Given the amount of uncertainty present in the external environment at present it
may be appropriate to include more sensitivities in to the forecasting. The FRC also commented
in their going concern review that the like the idea of going back to the last financial crisis to
consider how well the entity performed in managing the situation as an additional piece of
information.
 Think carefully about Letters of Support – what are we using them for? We need to get audit assurance
and its unlikely on their own a letter of support will be enough. Be carefully getting too drawn in to the
whole idea of them being legally binding – this shows they were legally binding at one point in time but
this could be changed by the entity after the year end – this might give some comfort to detail alongside
any material uncertainty but is unlikely to remove a material uncertainty altogether if this is the only
evidence we have.

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AUDIT CONSIDERATIONS
OVERALL APPROACH

Plan early Follow the process Document all stages clearly

Follow the guidance on Audit Insite.

MATERIALITY
In a the rapidly changing environment the timing for assessing materiality also needs to be considered and
it may need to be determined closer to the start of fieldwork and continually reassessed up to the date of
the audit report. Calculating materiality at interim or months before fieldwork may require a reassessment
if there are significant changes after the initial calculation of materiality. When assessing materiality,
considerations should include:
 Would it be appropriate to choose a different benchmark? Have users changed their needs in the current
environment?
 Is normalising appropriate? This will depend on whether changes are considered short term or the ‘new
normal’
 Is averaging the benchmark over time appropriate? This may not be the right answer if you conclude the
business is actually seeing a consistent downturn which isn’t a ‘blip’ or users actually want to see the
true effect of the pandemic on the financial statements
 Would using a specific materiality for some balances be appropriate?
 We should also considering prior period unadjusted errors where materiality drops significantly this year
– does this now mean they need adjusting?
A document is available on Audit Insite which considers these factors in more detail.

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AUDIT CONSIDERATIONS
GROUP AUDITS
The combination of Brexit and COVID give us a number of issues to consider in relation to group audits:
 Once we leave the EU will we be able to access working papers of any EU subsidiaries? This may well be
required by our regulators and needs consideration
 Exemptions that were available may no longer and this includes exemptions from some group reporting
requirements – ensure we are in discussions early to ensure they are aware of how this might affect
them.

Audit Tips
We must be able to gather the necessary evidence to be able to report or consider
modifying our audit opinion. At an early stage we need to decide what alternative
procedures we may need to undertake and how these will be able to provide us with
sufficient appropriate audit evidence.

CHALLENGE AND AUDIT EVIDENCE

 Discussions with management are not enough to give us comfort over judgmental areas particularly
relating to future performance. In the current period this has never been more pertinent – with Brexit
and COVID there is even more of a risk of management override and wanting to show a more favorable
performance or bury bad news with the use of ‘excessive prudence’ therefore corroboration of
management judgments, estimates and assumptions is key.
 We cannot accept substandard procedures for December 2020 year ends. There may be times when the
audit team will conclude it is ‘too difficult’ to perform the preferred procedure – and a consideration is
then needed as to what this means for the audit approach and conclusions. ‘Difficulty’ will not be an
accepted defense for substandard or missing audit procedures – we still need to obtain sufficient,
appropriate audit evidence to support our audit option
 Be particularly challenging with one off losses, provisions and write offs - if results will be bad anyway
there may be a temptation to exhibit ‘ excessive prudence’.
 Where we are able to obtain an external confirmation ensure this comes directly from the third party
and never via the audited entity.
 Written representations are helpful but they will never, alone, constitute sufficient appropriate audit
evidence. We need to ensure we do not attempt to rely on these as evidence in areas where we are
struggling to gain sufficient, appropriate audit evidence due to the circumstances. Instead a
consideration must be made in relation to how this might affect our audit report.
 It is of critical importance we document our current thinking as and when it happens - this will put in to
context the current thinking of the particular point in time.

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AUDIT CONSIDERATIONS
ANALYTICAL REVIEW
 Analytical review may well be a tricky technique for December 2020 year ends – is the past a suitable
comparison given the unprecedented circumstances of 2020? Will this therefore give us any meaningful
results?
 In relation to forecasting performed by management we look back at their past forecasting compared to
actual performance to give us some comfort as to how accurately they are able to assess business
performance – given the combination of Brexit and COVID– can that give us as much comfort as it once
would? We need to ensure we consider this on the file and include our conclusions.

PYAS AND POLICY CHANGES

 Ensure we are very challenging with management and this shows on the file – why are policies being
changed? Is there an appropriate business reason or is this an attempt to present better results?
 Ensure we consider whether the entity is making an attempt to ‘lose’ other bad news under the guise of
Brexit or COVID – in order to be true and fair the financial statements need to reflect and disclose
circumstances clearly.

CWTCWG
 Ensure when we are drafting communications with those charged with governance we are Integrating
Brexit and COVID throughout not just including a single page at the end – this is no longer appropriate
 Ensure you act immediately on the fact that Brexit will be an in year event - get communicating to
ensure the audited entities have appropriate awareness
 We may not be able to have face to face meetings with TCWG so we need to agree upfront how we will
communicate with them during the audit and ensure there is enough time in the timetable for
discussions around more difficult topics such as potential modifications to the audit report.

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SUPPORT AND GUIDANCE AVAILABLE

SUPPORT AND GUIDANCE AVAILABLE

There are several sources of guidance that are available to you, including:
 The BEIS business auditing, accounting and reporting website (see the QR Code for the information
relevant to UK companies).

 BEIS webinar – Covers the upcoming changes and is available on YouTube

 The key source legislation that applies to the companies you audit should also be referred to. Sometimes
there isn’t really a short cut.
 Audit Insite will be kept up-to-date with information as and when appropriate.
 ICAEW Brexit checklist – Includes lots of practical considerations for companies, including customs duties,
the management of personal data and employment issues.
 ICAEW article Practical help for preparers – A further summary of the main areas of consideration.
 The FRC Lab’s end of year newsletter - Obtain a better understanding of what the FRC is looking for.
 The FRC issued consolidated COVID-19 guidance for auditors and companies that supersedes all previous
FRC guidance for companies and auditors. While on COVID-19, many of the messages will be helpful for
navigating the Brexit impact. The audit guidance is found here, and the company guidance can be found
here.
 FRC guidance on accounting standards for companies preparing IAS accounts with accounting periods
straddling the end of the Transition Period.
 UK Endorsement Board (EKEB)

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