Government signals support for FRC and IFRS post-Brexit

The government has revealed plans to transpose EU-adopted IFRS into UK law and introduce a UK corporate reporting and audit framework, which will be controlled by the Financial Reporting Council (FRC), subject to EU agreement

The UK Brexit negotiating team will put the plans to the EU to ensure continuity after the UK leaves the EU in March 2019 and inform the development of the future framework.

The government has already transposed the EU Accounting and Audit directives into UK law and will go on to transfer International Financial Reporting Standards (IFRS), through the EU (Withdrawal) Bill, which is widely used across the EU, into UK law. This will ensure equivalence between the UK and EU’s respective IFRS standards allowing company accounts to be comparable across countries.

The Department for Exiting the European Union has produced a document highlighting what could happen if the UK adjusts IFRS or does not maintain equivalence on audit regulation.

On IFRS the document states: ‘Without regulatory cooperation on UK and EU IFRS there’s a risk that the standards could diverge and equivalence would break down.’

This means that companies would need to produce two sets of financial statements. This is expensive and complex for companies and reduces clarity for investors.

From 1 January 2019 companies will have to adopt IFRS 16 Leases under EU law until it is transposed into UK law. IFRS 17 Insurance Contracts does not have to be implemented until 1 January 2021, after the UK has left the EU, so it is likely that this will be transposed into UK law and also made mandatory to maintain equivalence with the EU.

The UK and EU will have to ensure that audit regulators in both jurisdictions have adequate processes in place as without an agreement the incoming audit authority will not be recognised for regulatory cooperation and so the inspection will not be able to happen. This means that future filings and sanctions across borders will be void and companies’ accounts will have to be audited more than once.

The government is keen to keep the FRC as the UK’s competent authority for audit post-Brexit although it has commissioned an independent review of the regulator to ensure that it is fit for the future.

Existing third country regimes do not cover all accounting and audit issues, notably corporate reporting and audit requirements so the government has signalled plans to agree provisions on these issues with the EU going forward.

Framework for the UK-EU partnership Company law (accounting and audit) is here. 

Report by Amy Austin

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