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Six ways Brexit will impact companies’ financial statements

 

IN LIGHT of the referendum vote for the UK to leave the EU and the consequential uncertainties in the political and economic environment, the FRC has highlighted the things directors should consider when preparing their forthcoming half-yearly and annual financial reports.

 

Business model
The FRC encourages clear disclosure of a company’s business model as part of the strategic report, including a description of the main markets in which the company operates and its value chain. The disclosure should be sufficient to enable readers to make an assessment of the company’s exposure arising from the outcome of the referendum.

 

Principal risks and uncertainties 
Directors must consider the nature and extent of risks and uncertainties arising from the result of the referendum and the impact on the future performance and position of the business. These may also have an impact on reported amounts which could lead to further consequences such as an effect on debt covenants.

 

Those which the board judge to be principal risks and uncertainties must be disclosed and explained in the company’s interim management or strategic report. The outcome of the referendum may give rise to general macro-economic risks or uncertainties that affect all companies as well as those risks that are specific to a particular company or industry sector. Care should be taken to avoid ‘boilerplate’ disclosures. Company specific disclosures are more informative and useful to investors, for example, the impact of trade agreements for companies with a high level of exports to Europe.

 

The FRC attaches great importance to clear and concise reporting and any risks and uncertainties that are disclosed should enable the reader to understand how those risks and uncertainties are relevant given the specific facts and circumstances of the company. We would also expect boards to provide an explanation of any steps that they are taking to manage or mitigate those risks.

 

As part of the assessment of principal risks and uncertainties, boards should consider whether the referendum vote gives rise to solvency, liquidity or other risks that may threaten the long-term viability of the business; and any implications for the viability statement in the annual report.

 

Market volatility
The volatility in the markets following the referendum result may have an impact on balance sheet values at 30 June 2016 or at subsequent reporting dates. For example, financial instruments measured at fair value and discount rates used in measuring pension and other liabilities may be affected by changes in foreign exchange rates, interest rates or market prices.  Cash flows included in future forecasts may need to be re-evaluated.

 

In respect of foreign exchange risk, the board may wish to consider the potential gains or losses arising from transactions in foreign currencies, for example, the impact on future earnings as a consequence of the decline in the value of sterling for non-UK sales.

 

The FRC encourages directors to consider whether assets may be impaired and/or disclosures made consistent with the requirements of IAS 36Impairment of Assets, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures.  They may need to consider the continued recognition of deferred tax assets.  Attention should also be given to the nature and extent of sensitivity disclosures required by IAS 1 Presentation of Financial Statements that support estimates in the annual financial statements where due to volatility, in the short term, ranges may be wider.

 

Boards should also consider the disclosure of events after the reporting period that have not been adjusted in the financial statements. Examples of such events include abnormally large changes in asset prices or foreign exchange rates.

 

Going concern basis of accounting 
As part of the preparation of the financial statements, directors must consider whether the going concern basis of accounting is appropriate and whether disclosures of material uncertainties are needed particularly where there is a material risk of breach of covenants.

 

Further guidance on the application of the going concern basis of accounting is included in the FRC’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting and the FRC’s Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks.

 

True and Fair 
There is an overarching requirement for annual financial statements and half-yearly reports of listed issuers to give a true and fair view. We encourage directors to consider whether additional disclosures are necessary to ensure that this requirement is met.

 

Half-yearly financial reports 
There is a general requirement that the interim management report of listed companies must include disclosure of important events that have occurred during the first six months of the financial year, and an indication of their impact on the interim financial statements.

 

14 Jul 16 | | Accounting standards Governance Regulatory bodies

How accountancy firms are responding to Brexit

 

TRADITIONALLY August is a quiet month for accountancy firms. Not so this year, though. The surprising ‘leave’ result following the 23 June referendum on whether the UK should exit the European Union means firms of all sizes have got their work cut out for them this summer.

 

Like many companies most firms set up ‘emergency’ Brexit task forces within hours of the ‘leave’ result announcement. The main aim of these so-called Brexit committees was to have a single port of call for clients where partners could allay immediate fears about the unexpected referendum result and respond to business queries on finance, tax, deals and cross-border transactions, among other pressing issues.

 

In the wake of the ‘leave’ outcome, the rising panic felt among many businesses was reflected in the markets and sterling. A month on since the referendum and some of that market volatility has subsided. The value of the pound remains low however.

 

Brexit taskforces

In the calmer climate that is now seemingly prevailing it appears that nothing has happened, and as yet very little has changed, but there is much to do. KPMG is taken a rather nifty, logical approach to their Brexit plan, the so-called 2-2-2 plan. This translates into two weeks, two months, and two years. Not only is this approach rational in guiding companies to map out future plans clearly, it fits in neatly with the supposed timeframe (two years) it will take for Britain to leave the EU once prime minister Teresa May triggers Article 50 of the Lisbon Treaty.

 

Karen Briggs, head of Brexit at KPMG says the immediate issues that they have been helping clients deal with have primarily focused on people and finance. Many companies have at least some EU nationals working for them so it has been a case of communicating that nothing will change for them in terms of their current status to remain in the UK.

 

“There are immediate issues, for example people and finance, and then with the less immediate you can set out in a risk map and then for the longer term you need forensic analysis of your business,” Briggs says.

 

Aside from working closely with companies on the immediate issues Briggs says KPMG is liaising with government, trade and consumer organisations on behalf of clients to influence the debate about Britain’s exit from the EU and what our future trade arrangements with the EU will look like.

 

EY, PwC and Deloitte have all also set up Brexit teams and are working with clients and liaising with trade bodies to help shape Britain’s EU exit.

 

BDO has also set up a five-partner Brexit task force with the idea of assimilating all the information and building a strategy not just for its clients but for the firm as well. “It’s important that we look at all the issues first-hand then we can share our own experiences with the clients,” says Stuart Lisle, tax partner who sits on BDO’s Brexit taskforce.

 

There could be less transactional work for firms as CFOs cut back on their spending and hiring plans Source: Deloitte

There could be less transactional work for firms as CFOs cut back on their spending and hiring plans
Source: Deloitte

 

Ifs, buts and maybes

Lisle suggests it is more likely to be three years before Britain leaves the EU given that there are three general elections scheduled for next year in Holland, France and Germany. There would be little point in May, or rather foreign secretary Boris Johnson, negotiating new trade terms with the incumbent leaders in those EU countries if they might not hold power by the end of 2017.

 

“Three years is a long time in business. There are a lot of ifs, buts and maybe, and few clear messages coming out of government,” Lisle says.

 

That said, BDO is working with clients to scenario plan around the five possible trade models that Britain could adopt post-exit. BDO has also just set up a Brexit-dedicated microsite for clients. And in terms of opportunities for the firm, BDO has been approached by international organisations overseas wishing to get a first-hand view of “what is happening on the ground in the UK”.

 

“The main message is ‘don’t panic, there’s lots of time’, but you need to have it on the agenda and have someone responsible for keeping the board abreast of changes and developments,” Lisle says.

 

How smaller firms are responding

Bobby Lane, head of outsourcing and business development at Shelly Stock Hutter at the smaller end of the accountancy scale, whose clients include start-ups, SMEs and subsidiaries of multinationals, are advising any clients dealing with foreign exchange to derisk their exposure immediately.

 

The main advice Lane’s firm is handing out is to make sure business forecasts are up-to-date and identify any cash requirements due to the potential for a rise in the cost of capital. The greatest pain point for some of his clients has been the fall in sterling, which may have led to some being close to breaching loan covenants.

 

Lane is confident opportunities are afoot for his firm. “In times of stability business get complacent and price becomes the driver in choosing a business adviser. But in times of uncertainty people look for the best option and not the cheapest option,” he says.

 

An issue of mindset

As for the advisers of small, one-person businesses like Dennis & Turnbull, accountant Carl Reader says that after the initial panic following the result “not much has happened”.

 

“It’s more an issue of mindset,” Reader says.

 

Of course there is some pain for clients who are importers of goods given the fall in sterling but Reader says markets priced it in a while ago, and on the flip side exporters are benefitting from a weaker pound.

 

The overall message from accountants is – that once you have allayed the fears of EU staff and ensured your financing needs are in place – to remain calm and to think logically about the potential outcome further down the line and its impact on your business.

 

Unless something radical happens between now and when Article 50 is evoked – and of course we can’t rule that out given the recent state of political turmoil in the UK – it is indeed business as usual. And for some, a lot more business than is usual for this time of year.

 

22 Jul 16 | | Accounting firms

HMRC must win public trust for digital services, finds NAO report

 

HMRC must increase transparency and think more about users when moving to a digital tax system, if it’s to boost trust of its services, the National Audit Office has said.

 

While the auditor’s 2015-2016 report was relatively positive, a number of areas of concern were raised, such as continuing high levels of fraud in some parts of the welfare system and unanswered questions around its digital ambitions remain areas of concern, sister title DigitalByDefault reported.

 

HMRC has begun to implement its plans to transform how it administers tax, in line with its vision to have the most digitally advanced tax system in the world. By 2021, it expects to employ 16% fewer staff, substantially rationalise its estate and automate more of its processes. As a result, in the past year HMRC has made plans to invest more than £2bn on its transformation in the next five years; launched digital accounts for individuals; announced plans to close 137 offices and the location of 13 new regional hubs; and secured agreement for its plans to replace its IT services contract, Aspire, which it has revised to reduce the risk of carrying out too much change too quickly.

 

An NAO statement says that the HMRC’s approach looks credible and proportionate to the scale of the risks involved, and it has worked closely with the Treasury and Cabinet Office to develop and refine its plans. It is too early to evaluate how well its approach is working but one of the most critical tests will be how management responds when things do not go as expected.

 

The NAO has identified two areas of risk:

  1. Optimism bias in key assumptions – in the last Parliament, HMRC was over-optimistic about how much change it could deliver all at once, and how fast it could reduce demand for telephone contact in particular. This resulted in a collapse of its service to personal taxpayers in 2014-15 and the first half of 2015-16. HMRC has since recovered the quality of its service to personal taxpayers by recruiting more staff and has adjusted its future resource plans in the light of this experience.
  2. Understanding the costs and benefits to taxpayers – HMRC has yet to estimate the costs for individual taxpayers or businesses of making the transition to online services or to quantify the benefits they can expect. Over the next year, it plans to develop a fuller picture of what it will cost taxpayers to use the new systems. Most business customers will be required to update HMRC quarterly rather than annually about their tax affairs, and some may need to purchase new software that works with the new systems. Some businesses are sceptical of HMRC’s evaluations of the costs and benefits of previous changes to the tax system.

 

Fraud and error

The NAO’s analysis suggests that more still needs to be done by HMRC to use data and technology to reduce fraud and error.

HMRC estimates that overpayment of child benefit due to error and fraud was £170 million in 2015-16, or 1.4% of the total outlay, and £1.37 billion overpayments – 4.8% of the entirety – on the related benefit of personal tax credits. The main problem here, says the auditor, is out of date information, or an inability to collect the right information from claimants in time.

The NAO report can read in full here.

 

19 Jul 16 | | More News

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