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Accounting for Brexit

23 November 2016 by John Stittle

Accounting for Brexit - read more

The future of corporate reporting in the UK is lacking clarity, precision and direction

The UK government has now publicly accepted the decision of the electorate to leave the EU and is expected to trigger the leaving mechanism in 2017. Leaving the EU does not just have major once-in-a-lifetime political and economic implications, it may also affect aspects of corporate reporting and associated audit and taxation issues.

UK trading relations with its former EU neighbours are currently surrounded by indecision, opaqueness and uncertainty. This lack of direction is also reflected in many accounting matters.

EU regulations

Since 1973, when the UK first joined the EEC – the forerunner of the EU – British companies have been subject to significant corporate reporting regulatory controls and directives coming from Brussels. The EEC’s, and now the EU’s, influence on reporting has been significant. Over the years, some of the requirements have led to a number of major reforms and upheavals in UK reporting.

The first significant change that still affects UK corporate reporting was when the EEC issued the 4th directive on annual accounts in 1978 which was incorporated into the Companies Act 1981. Previously, UK company legislation was predominantly concerned with the content of financial statements. But the Companies Act 1981 required company financial statements to adopt both more specified content and more highly structured and regimented formats.

This was later followed by the 7th and then 8th directives that laid down more detailed requirements for companies’ consolidated accounts and for auditors’ qualifications.

International standards

Over the decades, the power and influence of the emerging EU became increasingly important and another major EU reform came in 2005. The EU insisted that IFRS would apply to the consolidated financial statements of any company listed on an EU stock exchange. However, unlike many other countries, the EU would not necessarily accept international standards issued by the IASB.

All new international accounting regulations from the IASB would have to be approved by the EU’s Accounting Regulatory Committee. As a result, and contrary to the IASB’s original intentions, the EU has periodically omitted sections of the full IASB’s standards and selected only those parts of the rules it wanted to implement.

In the post-Brexit era, the issue now facing companies and financial regulators is just what type of reporting standards will be ultimately adopted – both in the UK and by the EU. However, from the UK’s perspective, it is unlikely that the UK professional accounting bodies and the FRC will seek to support leaving IFRSs and returning to UK Generally Accepted Accounting Practice.

The UK has always been a strong supporter of international accounting rules. Indeed, with the UK now expecting to enter into trade deals in a more extensive international context, the possibility of the UK ignoring the IFRS and returning to its own standards seems even more remote.

There is also the US context to consider. Since 2007, overseas companies seeking a listing in the US have been able to use the original form of IFRS instead of implementing US GAAP.

Adopt not adapt

However, Brexit may offer the UK even greater accounting advantages by keeping with IFRS. Currently, once the IASB has issued a new reporting standard, the EU insists that it then ‘ratifies’ the new rules. For many years, the IASB has encouraged and supported an ‘adopt, not adapt’ policy of wanting countries to implement an IFRS in its entirety. However, at the EU level, the result has often been interminable delays and political manoeuvring while the international standards are discussed.

Unlike many EU politicians, the UK has never been a supporter of adapting or modifying the IFRS once they have been issued by the IASB. The UK, as with most other countries around the world, conform to the IASB’s intention of full acceptance of IASB regulations. So overall, it’s almost certain the UK listed companies will continue to use IFRS.


Indeed, Brexit may even mean speedier acceptance of new international standards in the UK. There are some standards that the EU has viewed with suspicion causing considerable delay. One of the more prolonged EU discussions on reporting standards has concerned IFRS9, ‘Financial Instruments’, that has become tangled up in the European political bureaucracy.

Although IFRS9 was issued by the IASB in July 2014, the EU was expected to finally endorse the standard in the first half of 2016 – but yet again this timescale has slipped further. Some politicians believe national self-interest of some EU countries has led to delay in IFRS9’s introduction because of its potential impact on causing significant debt write-offs for French and German banks.

Paradoxically, Brexit might even provide the EU with what some European politicians might regard as a golden opportunity to gradually withdraw from some aspects of, or even from the entire, IFRS regime.

For many years, some EU politicians have regarded IFRS as a regulatory model based unduly heavily on Anglo-Saxon influence. Indeed, in recent years, the greater convergence of reporting standards between the IASB and US regulators has further irritated some EU national governments. Brexit may well provide a convenient excuse for the EU to increasingly distance itself from IFRS – or develop their own more ‘European based’ standards.

UK regulators

The UK financial reporting regulator, the FRC is also vague about what Brexit means in practice. The FRC has already stated that its regulatory framework currently remains ‘unchanged’ as a result of the Brexit vote and it would continue to be applicable for the time being.

In many ways, the FRC is at a loss to be more precise about its future role. The FRC merely states that it will ‘pay close attention to the decisions now taken by the (UK) Government and Parliament’, and that it would work in collaboration with stakeholders to ensure its work ‘continues to support economic growth.’

It’s not just FRC that’s unsure of Brexit’s implications. Its fellow regulator, the Financial Conduct Authority, whose function is ‘to protect and enhance the integrity of the UK financial system’, is equally hazy. The FCA has stated that: ‘Much financial regulation currently applicable in the UK derives from EU legislation’, which will ‘remain applicable until any changes are made’. But the FCA does admit that Brexit has ‘significant implications for the UK’ and ‘it is monitoring developments in the financial markets closely.’


Brexit might also mean that the recent EU audit reform directive requirements may now be revisited by the UK. These new audit regulations affect many areas of audit regulation, audit quality, independence and oversight of auditors.

In particular, the new detailed regulations will require limiting the proportion of non-audit fees that auditors can incur and provide further details on mandatory audit firm rotation. Although many of these changes to varying degrees have already been accepted by regulatory bodies in the UK – there is no guarantee post-Brexit that the UK will stay committed to these audit changes in the longer term.


In future, the UK will be freed from the requirement to impose some EU taxation regulations. In particular, the UK will have more freedom to change VAT rates as it is a turnover tax and so currently subject to EU rules.

EU VAT directives require that standard VAT rates must be at least 15% and reduced rates to be at least 5%. Brexit will provide the UK with far more flexibility for many of the current VAT provisions and in changing some rates to suit better its own circumstances. Although direct taxation, such as income and corporation tax, does not generally fall within the remit of the EU – there are still implications.

Brexit will free the UK of the European Court of Justice rulings on direct taxation where legal action is brought on the basis that such taxes are alleged to infringe on freedom of capital, people or services. The UK would also be free of the EU’s Anti-Tax Avoidance Directive and could then introduce more targeted arrangements more compatible with the UK’s tax rules.

The EU’s proposed financial transaction tax will almost certainly be dropped by the UK after Brexit as it is viewed as a threat to the country’s financial services industry. In addition, the EU’s proposed directive on BEPS (base erosion and profit shifting), as a way of capturing higher taxable corporate profits, may not be introduced for UK companies.

Overall, the future of corporate reporting in the UK, as with so many issues concerning Brexit, is lacking clarity, precision and direction. It will take several years before a clear roadmap emerges that plots the course of any reforms to UK corporate reporting.

But for one business sector there is already a massive opportunity. The ‘Big Four’ accounting firms are now offering Brexit support services to clients and providing advice to the UK government in negotiating new global trading agreements.

John Stittle is a senior lecturer at the University of Essex

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