The Financial Reporting Council (FRC) has outlined the high-level considerations directors should have in mind when preparing their forthcoming half-yearly and annual financial reports in the light of the referendum vote for the UK to leave the EU and the consequential uncertainties in the political and economic environment
The regulator is encouraging companies to instigate early dialogue with their auditors to determine what disclosures, if any, are required to ensure their financial statements and management and strategic reports meet the needs of investors and comply with regulatory requirements.
The FRC says reports should include 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. Under principal risks and uncertainties, companies should consider the impact of the referendum result on both future performance and position of the business, and on reported amounts, which could lead to further consequences such as an effect on debt covenants.
The regulator warns 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 said: ‘We encourage directors to consider whether assets may be impaired and/or disclosures made consistent with the requirements of IAS 36 Impairment 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.’
Danielle Stewart, head of financial reporting at RSM said that while the general disclosures being suggested by the FRC helpful, the firm was encouraging clients to think as specifically as possible and evaluate how Brexit affects their own activities across a wide range of areas.
‘For example, as the FRC mentions, certain assets may be impaired or contracts previously considered to be long term might be cancelled, impacting going concern. However, the FRC doesn’t mention contingent liabilities that may arise from Brexit, depending on the deal that is done with the EU, the potential impact on profitability of non-recoverable VAT for companies which currently incur and recover a lot of input tax in other EU states, the effect of no longer receiving a grant or subsidy from the EU nor even the somewhat unlikely impact on operations of a mass exodus of European employees,’ Stewart said.