Areas of accounts that are likely to be affected for companies reporting under FRS 102 and FRS 102 1A.
ACCA members need to consider how reported numbers and disclosures in accounts will change in case of a no-deal Brexit. This article considers areas of accounts that are likely to be affected for companies reporting under FRS 102 and FRS 102 1A. The guide does not consider issues specific to group companies.
More reliance on judgement
With little knowledge of how trading with the EU will look after a no-deal Brexit, accountants may find themselves relying on management judgement more than ever before. It is possible that matters previously considered straightforward may become less obvious and reporting on them will need to be approached with caution. Practitioners should highlight those areas in discussions with management and be prepared to challenge directors’ judgements and assumptions, in a way that will result in prudent reporting. This may require practitioners to devote more time to prepare true and fair accounts and to achieve balance between optimistic but unsubstantiated assumptions and overcompensating by taking an overly pessimistic view.
Going concern
Where clients have predominantly EU based customers, profitability of sales contracts is likely to be affected by customs duties, imposed cross border fees, the cost of logistical delays, forex losses caused by the weak sterling, to name a few. Contracts already in place may become onerous, unless they can be renegotiated, as pressure on cash flow increases in the short to medium term, until stability returns.
Going concern uncertainties should be highlighted in the accounts as usual (see more below), and the availability of shareholders’ ongoing support or third party funding confirmed in the context of a higher than usual commercial risk. Practitioners relying on directors’ representations in relation to availability of financial support should ensure such commitments are relied on only when verified and confirmed.
If the negative impact of the adverse trading environment cannot be mitigated and the margins are insufficient to absorb losses, accounts should be prepared on a breakup basis.
Impairment of assets
A no-deal Brexit may impact recoverable amounts of assets. If assets’ recoverable values fall below their carrying amount, impairment should be recognised immediately. Inventories and other assets held at cost such as property or certain equity investments are among those affected.
Impairment is discussed in section 11.21 (debtors and other financial instruments) and section 27 Impairment of Assets (stock, fixed assets, goodwill, other intangibles) of FRS 102.
Inventories
- inventories must be reviewed for impairment annually, irrespective of whether or not there is an indication of impairment
- impairment factors to consider: adverse legal post Brexit landscape, increase in costs to sell, higher employment costs, availability of labour supplied by EU workers
- compare the carrying amount of inventories with the selling price and direct and incremental costs to complete and sell, based on all reliable evidence, on an item by item basis, or, if impracticable, per groups of related items
- consider knock-on effect on related balances, such as WIP, which may need to be impaired if finished goods need to be impaired.
Assets other than inventories
- assets other than inventories, for example PPE or some equity investments, must be reviewed for impairment if there are any internal or external indications that recoverable values are below carrying amounts
- recoverable amounts may be the assets’ values in use (the value that a business achieves by holding and using the asset) if higher than the selling price the asset could achieve if disposed of, less costs to sell. For example, commercial property may not be affected despite no-deal Brexit, when it is fully utilised by the business, rather than surplus to requirements
- consider impact of impairment on useful lives and depreciation estimates as these may decrease.
Reliance on valuations
In a climate of a no-deal Brexit uncertainty, clients should consider utilising professional valuers, rather than relying on directors’ valuations, even though FRS 102 does not mandatorily require professional valuations. Specialist assets or assets for which active market comparables are not freely available may have to be professionally valued irrespective of the impact of Brexit.
Provisions
Overproviding based on Brexit uncertainty should be avoided. Any costs expected and associated directly with Brexit should only be provided for if there is a legal or constructive obligation to incur those costs at the balance sheet date.
If a client is pushed into restructuring as a result of Brexit, section 21.11C of FRS 102 explains that a constructive obligation to make a provision exists only when detailed plans to restructure have been formulated by the year end and formal announcements have been made to those affected. An intention to restructure at some point in future is insufficient to recognise a provision.
Emphasis on disclosures of uncertainties, judgements and estimates
Material judgements and estimates made by directors as a result of uncertainties faced should be disclosed separately:
- disclosure of uncertainties related to events or conditions that cast significant doubt upon the entity’s ability to continue as a going concern (FRS 102, section 3.9)
- disclosure of significant uncertainties affecting the value of recognised assets and liabilities (FRS 102 section 8.7).
Where uncertainties result in directors making judgements or estimating values, those should be disclosed in accounting policies. Focus should be on areas of significant risk of a material change to within the next year. Specific amounts at risk of material adjustment should be identified.
In some circumstances, it may be necessary to quantify and disclose a range of material outcomes based on underlying estimates. Changes assumptions and estimates made in the past should be explained.
Significance of disclosure of post-balance sheet events
To capture all material impacts of Brexit, clients should plan to undertake a comprehensive post balance sheet event review. During the review, information may be found after the year end, which provides evidence in relation to:
- circumstances that existed at the balance sheet date – adjusting post-balance sheet event
- circumstances that arose after the balance sheet date (for example relevant Brexit terms are formulated after the balance sheet date) – non-adjusting post balance sheet event, which should be disclosed.
Requirement of more detailed disclosures
The complexities of no-deal Brexit are likely to require more detailed disclosures, even for small companies applying FRS 102 1A, due to the overall true and fair view requirement included in paragraph 1A.16.
A good reference point for the standard of disclosure by small private companies may be FRC’s Reporting by smaller listed and AIM quoted entities
Increased value of directors’ report
Whilst not mandatory for small companies, including a directors’ report in the accounts may provide valuable context and insight into the company’s post-Brexit future, including information on its ability to deal with challenges and uncertainties.
Article from ACCA In Practice