Brexit – amendments to UK GAAP

The Financial Reporting Council (FRC) has updated UK and Republic of Ireland accounting standards for changes in legislation following the UK’s exit from the European Union.

The amendments are limited to those necessary to ensure consistency with UK company law and largely update legal references and terminology used in the standards. The effective date for the amendments is accounting periods beginning on or after 1 January 2021, with early application of UK-IAS permitted for UK entities in certain circumstances. There should be no practical impact on entities in the Republic of Ireland.

FRS 101 Accounts - Basis of Preparation

FRS 101 accounts of UK incorporated companies will no longer refer to ‘EU-adopted IFRS’ in the basis of preparation.

From 1 January 2021, the UK will have its own IFRS endorsement process and Companies Act 2006 ‘IAS accounts’ will be prepared in accordance with UK-adopted international accounting standards (‘UK-IAS’). UK-IAS will comprise EU-IFRS as it stands at 31 December 2020 plus any UK endorsements from 1 January 2021.

In-line with changes to IAS accounts, FRS 101 will comprise:

• the recognition, measurement and disclosures in UK-IAS (rather than EU-adopted IFRS), with
• amendments to align recognition and measurement with UK company law and to reduce the disclosure requirements.

The amendments to FRS 101 also include the option to early-adopt UK-IAS. Therefore, for periods commencing on or before 31 December 2020, FRS 101 accounts can be based on either:

1. EU-adopted IFRS, or
2. UK-IAS, if the entity chooses to early-adopt the December 2020 amendments to FRS 101 and states that fact.

Entities that refer to ‘EU-adopted IFRS’ in the basis of preparation within the notes to their financial statements will need to change this to ‘UK-adopted international accounting standards’.

Audit reports and Directors’ Responsibilities Statements will remain unchanged as they simply refer to ‘FRS 101 Reduced Disclosure Framework’ and ‘United Kingdom Accounting Standards’.

FRS 100 - Interpretation of Equivalence

The interpretation of ‘Equivalence’ in FRS 100 will be updated in due course for changes to UK company law and decisions on equivalence.

Intermediate parent companies who previously took the exception not to produce consolidated financial statements under s400 of the Companies Act 2006 prior to 31 December 2020 will need to assess whether the consolidation exception can be taken (under s401 of the Companies Act 2006) once the additional application guidance under FRS 100 is published.

This will particularly affect intermediate parent companies included in consolidated accounts of an EEA parent which are prepared using a local EU GAAP (such as German GAAP). Those consolidated accounts would have met the s400 requirement to be prepared in accordance with the EU Directive, but may not meet the new S401 requirement to be prepared in accordance with UK law.

FRS 102 has been amended to align the consolidation exemptions for intermediate parent companies with revisions to UK law based on whether the parent company is established under UK law or not.

References to EU-adopted IFRS

In UK accounting standards, references to ‘EU-adopted IFRS’ have been amended to read ‘adopted IFRS’ which in UK law refers to UK-adopted international accounting standards.

Glossary amendments

The glossaries in UK accounting standards have been amended with the following new defined terms:

Adopted IFRS:

• IFRS that have been adopted in the relevant jurisdiction.
• In the UK, this refers to UK-adopted international accounting standards.
• In the Republic of Ireland, this refers to EU-adopted IFRS.

IAS (International Accounting Standards)/IFRS (International Financial Reporting Standards):

• Standards and interpretations issued (or adopted) by the International Accounting Standards Board (IASB). They comprise:

1. International Financial Reporting Standards;
2. International Accounting Standards; and
3. Interpretations developed by the IFRS Interpretations Committee (the Interpretations Committee) or the former Standing Interpretations Committee (SIC).

UK-adopted international accounting standards:

• IAS that have been adopted for use within the UK in accordance with the International Accounting Standards and European Public Limited – Liability Company (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/685).

FRS 103, FRS 104 and FRS 105

References in FRS 103 Insurance Contacts to the Solvency II Directive have been amended to refer to the transposition of that Directive into UK regulations through the PRA Rulebook.

There are no notable changes to FRS 104 or FRS 105, other than the amendments to the glossary noted above.

If you require any further information, please speak to Paul Merris.