From the IFRS Institute - May 2017
In March 2017, the UK activated Article 50 of the Lisbon Treaty, thereby commencing its exit from the European Union (EU). In April, the announcement of early elections in the UK showed the continued unpredictability related to the UK’s June 2016 referendum on Brexit. During periods of such heightened uncertainty and related market volatility, users will look for information in the financial statements and broader corporate reporting to better understand the effects these conditions could have on a company’s performance and to understand the actions taken by management to respond to the risks.
Measurement of assets and liabilities under IFRS
Uncertainty and volatility put particular pressure on the financial statement measures and related disclosures for items such as noncurrent nonfinancial asset and financial asset valuations, inventory values, potentially onerous contracts, deferred tax asset recognition, recoverability of receivables, hedge effectiveness, defined benefits obligations, and even the going concern assessment and covenant compliance.
Perhaps the greatest focus remains on asset impairment tests under IAS 36, Impairment of Assets, which require numerous factors to be considered.
Brexit monitoring activities
Management should conduct a robust evaluation of how the developments may affect their operations, including a comprehensive assessment of the risks and uncertainties they may be exposed to. This evaluation might comprise:
Because of the volatility in the British pound, preparers should monitor whether using an average exchange rate for translating foreign currencies as allowed by IAS 21, The Effects of Changes in Foreign Exchange Rates, remains appropriate.
Income tax impact
The UK currently operates under EU tax treaties for transactions with EU and non-EU countries. It is unclear which tax laws will apply after Brexit. Therefore, US companies with significant UK operations, which have benefited or are currently benefiting from various tax exemptions related to EU legislation because of the UK membership, may be affected.
Considering the unprecedented nature of the circumstances and the related uncertainty, the possible changes in the UK’s tax status should not be accounted for until the uncertainty is resolved. However, in the meantime, if material, a company should provide meaningful disclosures in its financial statements (or interim financial reporting) of the uncertainty about the effect of the UK leaving the EU.
Other Brexit-related disclosures
For companies that may be significantly affected by Brexit, the financial statements need to provide appropriate/enhanced disclosure so users are able to understand the effects of the events on the company’s financial position and cash flows – in particular, disclosure of risks, significant judgments and key assumptions in the financial statements.
As a reminder, IFRS requires disclosure of the following (not exhaustive).
The risk factors have led to increased risk disclosures with respect to forward-looking estimates and fair values. Furthermore, companies with significant UK operations have been providing more extensive risk disclosures in relation to the uncertainties and increased volatility as well as details about the potential effect of Brexit on their business models. Given the ongoing developments, this may require a company to update its disclosures to provide changes to its risk factors each quarter under IAS 34, Interim Financial Reporting.
The common risk factors expected in risk disclosures can be summarized as follows.
Specific considerations for foreign private issuers
FPIs are expected to include supplementary disclosures in their MD&A as part of their annual filings and interim information (when interim information is provided in the FPIs’ home countries). These supplementary disclosures focus on trends in operations and principal business risks and uncertainties, and their scope in the MD&A is generally broader and more forward-looking than information included in the financial statements. Determining which disclosures are appropriate requires consideration of what is important in the context of the company and its operations.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.