Accounting and audit implications if there is no Brexit deal

Posted in Corporate, M&A and securities Financial institutions

On October 12, 2018 the UK government published a technical notice explaining the implications for accounting, corporate reporting and audit if the UK leaves the EU in March 2019 with no Brexit agreement in place.

The notice states that if after March 2019 there is no deal, the UK government will ensure that the UK continues to have a functioning regulatory framework for companies and that, as far as possible, the same laws and rules that are currently in place continue to apply, but certain changes will be necessary to reflect the fact that the UK is no longer an EU member state.

As far as audit is concerned, the notice makes a number of points, including the following:

  • The UK will provide individual auditors with EU qualifications with a transitional period, from exit until the end of December 2020, during which they can apply to be recognised as auditors in the UK subject to passing an aptitude test. At the end of the transitional period EU auditors will cease to benefit from automatic recognition of their qualifications in the UK and may no longer be offered an aptitude test.
  • Audits of EU companies seeking to raise capital by issuing shares or debt securities on a regulated market in the UK will need to be undertaken by an auditor registered with the Financial Reporting Council (FRC). These audits will need to be included in a cycle of inspections, in which the FRC will visit the registered auditor in the EU member state where the business is incorporated until that member state is recognised in the UK as having an equivalent audit regulatory framework.
  • Audits of UK businesses seeking to raise capital by issuing shares or debt securities on a regulated market in the EU will need to be undertaken by an auditor registered as a ‘third country auditor’ in the EU member state in which the market operates. The audit will then be in scope of a cycle of inspections by the recognised authority for that market.
  • EU businesses operating in the UK seeking to raise capital by issuing shares or debt securities on a regulated market in the UK may wish to consider using an auditor registered with the FRC, and UK businesses wishing to raise capital by issuing shares or debt securities on a regulated market in the EU may wish to consider using a ‘third country auditor’ registered in the relevant member state.

In relation to accounting and corporate reporting, points made in the notice include the following:

  • UK incorporated subsidiaries and UK parents of EU businesses will continue to be subject to the UK’s corporate reporting regime but certain exceptions in the Companies Act 2006 relating to the preparation of individual accounts will no longer be extended to companies with parents or subsidiaries incorporated in the EU. For example, a UK company is currently exempted from having to prepare individual accounts if it is dormant and part of a group of companies with an EU parent company that prepares group accounts. This exemption will only continue to apply after exit if the parent company is established in the UK.
  • UK businesses with a branch operating in the EU will become third country businesses and will be required to comply with specific accounting and reporting requirements for such businesses in the member state in which they operate.
  • UK companies listed on an EU market may also be required to provide additional assurance to the relevant listing authority that their accounts comply with International Financial Reporting Standards as issued by the International Accounting Standard Board. This will need to be done in accordance with EU third country requirements.
  • Subsidiaries and parents of EU companies established in the UK will need to familiarise themselves with the exemptions in the Companies Act 2006 relating to accounting and reporting requirements that will no longer be extended to UK companies with parents or subsidiaries incorporated in the EU.
  • Branches of EU companies established in the UK will become subject to additional requirements under the overseas companies regime, and after exit will be subject to the same accounting and reporting requirements as non-EU companies that have a branch in the UK.

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