18 January 2021
On 23 November 2020, the Financial Reporting Council (FRC) and BEIS issued joint letters setting out changes to the UK’s corporate reporting framework from 1 January 2021, and the FRC provided further clarity on 23 December 2020 by setting out specific terminology to describe IFRS in UK entities accounts.
The changes have consequences for companies who report under IFRS and UK GAAP.
Although there is minimal change for 31 December 2020 year ends, entities with cross-border relationships within their group or who use EU-adopted IFRS should ensure they understand and plan for the impact.
The following highlights the key impacts on financial reporting, including audit exemption for qualifying UK subsidiaries via a parent guarantee from an EEA parent (s479A of the Companies Act 2006) as set out in the letter to the accounting sector.
UK incorporated companies or groups
Generally, there is no change for UK companies that apply UK Generally Accepted Accounting Practice (UK GAAP) to prepare their accounts unless they are caught by one of the following four situations.
1. Group accounts exemption for a UK intermediate parent company with EEA parent
For financial years commencing on or after 1 January 2021, the exemption under s400 of the Companies Act 2006 will no longer be applicable. However, the similar s401 exemption will be available where the EEA parent produces group accounts under EU adopted IFRS, or produces group accounts the company determines are equivalent to those required by UK law.
The FRC expects to update FRS 100 with further guidance and principles on equivalence in 2021.
If the EEA parent doesn’t produce group accounts that meet the equivalence test (and no-one further up the group does) the UK intermediate parent will need to produce group accounts at UK sub-group level.
2. Multiple lost exemptions for a UK incorporated subsidiary with an EEA parent, including lost audit exemption
For financial years commencing on or after 1 January 2021:
- audit exemption for qualifying UK subsidiaries via a parent company guarantee from an EEA parent (s479A) will no longer be available;
- a UK subsidiary in the scope of s414CA of the Companies Act 2006 can no longer rely on an EEA parent’s non-financial information statement, so this will need to be separately produced; and
- UK subsidiaries will no longer be able to routinely extend their accounting reference date to align with an EEA parent, thus extensions will only be permitted once every five years instead.
Entities could consider whether it is feasible to obtain an additional year of exemptions by drawing up their December 2020 accounts to 30 December 2020, either through a change of accounting reference date or using the seven-day rule. Careful analysis of the rules and application to all relevant group entities will however be required before doing this.
3. Dormant subsidiaries of an EEA parent
Dormant UK subsidiaries of an EEA parent will be required to produce and file individual annual accounts with Companies House for financial periods commencing on or after 1 January 2021.
4. Listed (debt or equity) in the EEA
The Transparency Directive currently permits use of UK GAAP for companies not required to prepare consolidated accounts. However, after the transition period, it is likely that companies that are currently permitted to use UK GAAP in respect of securities admitted to trading on a regulated market in the EEA will need to prepare an additional set of accounts that comply with the relevant Transparency Directive requirements.
EU adopted IFRS has been frozen as in force at 11pm on 31 December 2020 (12pm EU time). On 23 December 2020 the FRC issued transitional provision guidancewhich seeks to provide clarity and consistency of terminology in accounts, particularly for accounting periods that straddle the 11pm cut-off.
For accounting periods which commence before 11pm on 31 December 2020 companies must prepare accounts in accordance with the frozen EU adopted IFRS. However, UK companies also have the option to use any standards which have subsequently been adopted for use within UK adopted IAS. Nevertheless, all such accounts should state that they are prepared “in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006”.
The FRC also explains that if the company:
- also has transferable securities admitted to trading on a UK regulated market;
- is required to produce consolidated accounts; and
- is preparing accounts to satisfy DTR requirements.
Those accounts should additionally state that they are “prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union”.
For subsequent financial years, the accounts should state they are prepared ‘in accordance with UK adopted international accounting standards’.
For those subsequent accounting periods, (i.e. which commence after 11pm on 31 December 2020), UK entities will apply UK-adopted international accounting standards (UK adopted IAS) which will be IFRSs approved for use in the UK by the new UK Accounting Standards Endorsement Board (UKEB).
UK companies with EEA listing of equity and/or debt
For the purposes of the EEA listing from 1 January 2021, UK companies will need to comply with local regulatory requirements, eg stating accounts comply with both UK adopted IAS for domestic filing and IFRS as issued by the IASB (or other permitted equivalent standards). Companies should check with the relevant EEA competent authority to determine what format and disclosure is required in the accounts, and from what date.
UK issuers only admitted to trading on an EEA regulated market are no longer subject to Transparency Rules issued by FCA from 1 January 2021.
EEA incorporated companies and groups
EEA companies with UK listing
EEA companies with transferable securities admitted to trading on a UK regulated market and who use EU-adopted IFRS do not have to do anything.
EEA companies with transferable securities admitted to trading on a UK regulated market who use Member State GAAP for financial years beginning on or after 1 January 2021, need to prepare accounts in accordance with the law of the UK.
EEA companies with transferable securities admitted to trading on a UK regulated market need, in addition, to ensure that their EEA auditor is registered as a third country auditor on the register of third country auditors maintained by the FRC.
Intermediate EEA parent with UK parent
An intermediate EEA parent company owned by a UK parent may need to produce consolidated group accounts for their EEA sub-group, as well as individual accounts.
If you have any queries or require any further information, please contact Lee Marshall.
This article is based on letters published by the Department for Business, Energy & Industrial Strategy and the Financial Reporting Council. You can find the full, original texts at the gov.uk website.