Post-Brexit accounting and audit: Where are we now?

  • By Jeremy Williams
  • 26 February 2020 10:13

It’s been about a month since the UK left the EU, and we are currently in a ‘Transition Period’ (TP) – described in the withdrawal legislation as the ‘implementation period’. During the TP, EU law continues to apply to the UK in most respects, while the two sides negotiate their future trading relationship. The TP ends at 11pm on 31 December 2020.

During 2018 and 2019, the UK government laid Statutory Instruments for the accounting and audit sector, which had been intended to come into force on Exit Day (31 January 2020). In the end, this did not happen, since a withdrawal agreement was reached. The EU Withdrawal (Agreement) Act 2020 replaced references to ‘Exit Day’ in subordinate legislation with ‘IP Completion Day’ (IPCD), i.e. the end of the TP.

This month, the FRC issued new open letters dealing with the current situation for accountants and auditors during the TP – one covering accounting and one covering audit. You should download and read these in detail, if relevant. Many of the changes focus on public interest entities (PIEs) and companies listed either in the UK or in the EEA, which we will not cover in this article.

Here is a summary of the main issues for (unlisted, non-PIE) UK companies and their auditors raised in the FRC’s advice:

ACCOUNTING

Use of EU-adopted International Accounting Standards (IAS)

The FRC had previously advised that companies and groups currently using EU-adopted IAS will in future need to use UK-adopted IAS. The letter confirms that this will apply for financial years beginning after IPCD. UK GAAP is unaffected by this.

The government is in the process of setting up the UK Endorsement Board, which will eventually endorse IAS for use in the UK after IPCD. It remains to be seen whether the UK Board’s approach to IAS endorsement will vary significantly from the EU’s.

Companies and groups with cross-border activities

During the TP, arrangements for cross-border groups remain consistent with those prior to Exit Day. UK parents with EEA subsidiaries can continue to rely on ‘equivalence’ in UK GAAP for exemptions. Similarly, EEA parents with UK subsidiaries can benefit from existing exemptions from preparing and filing accounts, including:

  • exemptions from group accounts for intermediate UK parents with an immediate EEA parent; and
  • exemptions from preparing and filing accounts for dormant subsidiaries of EEA parents.

After IPCD, this may not be the case. UK companies or groups with cross-border activities (subsidiaries or branches in the EEA) must confirm reporting requirements with the EEA State(s) where subsidiaries or branches are based to see if there will be ‘equivalence’ arrangements after this point. Intermediate UK companies with an immediate EEA parent may need to produce group accounts, and dormant companies with an EEA parent will need to file individual annual accounts for financial years beginning after IPCD.

AUDIT

Cross-border conduct of audit work (including group audits)

UK auditors who currently conduct audit work in the EEA can carry on during the TP. Thereafter such work is likely to be subject to trade negotiations.

The basis on which group audits are conducted will be consistent during and (the FRC anticipates) even after the TP, including the group auditor’s ability to access working papers relating to EEA subsidiaries.

The EU Audit Regulation

The EU Regulation (which is partly reflected in ISAs (UK) and in the Ethical Standard) will apply both throughout the TP and largely afterwards as part of domestic, retained EU law. There will be amendments from IPCD – the FRC will advise on these in due course.

Audit qualifications and ownership of UK audit firms

All UK companies must still appoint a UK-registered audit firm, and their audit report will be signed by a UK-registered senior statutory auditor. UK firms who were previously on the Irish audit register needed to apply before Exit Day for this registration to continue. The ICAEW has confirmed that if your firm is no longer on the Irish Audit Register, you will need to need to update your stationery / website with the following ‘Registered to carry out audit work in the UK’ or similar to exclude Ireland.

Throughout the TP, UK-qualified auditors will continue to count as eligible owners and managers of EEA-based firms, and in turn all EEA auditors and firms will continue to be eligible to be included in a UK firm’s required ownership majority. After IPCD, this may not be the case (this will be subject to trade negotiations).

Existing statutory auditors who have passed an aptitude test following an EEA qualification, and are registered with UK recognised professional bodies, will continue to be registered after IPCD. EEA-qualified auditors who are not yet registered in the UK need, by IPCD, to pass the test (NB most Irish auditors’ qualifications are already recognised in the UK, except for those qualified as members of CPA Ireland) and to register.

We’ll continue to keep you posted with updates as guidance develops during the TP, and will cover the latest position in our CPD accounting and audit update courses throughout the year. Any technical manuals that you subscribe to, will be updated at the relevant time.

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