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On 26 March 2019, the UK Government enacted the International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/685). The regulation ensured that on the day that the UK leaves the EU, the International Accounting Standards enacted in the EU will automatically become the ‘UK-adopted’ standards. From this point the Secretary of State will have the power to adopt and amend new international standards into the UK. The regulations also permit the Secretary of State to delegate this responsibility to an appropriate independent body.
On 30 January 2019, the Government passed the Accounts and Reports (Amendment) (EU Exit) Regulations 2019 (SI 2019/145) and on 1 February it passed the Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019 (SI 2019/177). These amend the filing and audit exemptions for companies and LLPs ahead of the UK leaving the European Union. The legislation comes into effect on ‘Exit Day’.
The statutory instruments remove references to the European Economic Area (EEA) within the Companies Act, as well as other supporting regulations.
Among other things the regulations affect the ineligibility criteria for qualifying as a small entity, preparing and filing exemptions for dormant entities and the availability of an audit exemption for subsidiaries. The regulations also set out the process for the UK to adopt International Accounting Standards.
On the 23 October 2019, the Government passed the Statutory Auditors, Third Country Auditors and international Accounting Standards (Amendment)(EU Exit) Regulations 2019 (SI 2019/1392), which amends the Brexit Regulations which were issued earlier in the year.
Nearly all of the regulations released apply ‘immediately before exit day’, apart from the amendments made in reg. 3 which apply 21 days after the regulations are released.
The main change is made to the Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019 (SI 2019/177), reg. 4, which in turn amends the Companies Act 2006, s. 479A. Following the issue of SI 2019/1392, a subsidiary entity will only be able to take advantage of audit exemption if ‘its parent undertaking is established under the law of any part of the United Kingdom’. This means that subsidiaries will only be able to take the audit exemption, if they have a UK parent.
The product will be updated as required once these regulations come into force.
Two revised ISAs have been issued by the Financial Reporting Council (FRC) and are effective for financial periods commencing on or after 15 December 2019. Our products are currently in the process of being updated for the changes. A brief summary of the revised standards is below.
ISA (UK) 540 Auditing Accounting Estimates and Related Disclosures
ISA (UK) 540 (Revised December 2018) Auditing Accounting Estimates and Related Disclosures was developed in response to a changing business environment, increasing use and complexity of estimates in financial reporting and growing concerns from regulators and others that auditors were not always applying an appropriate level of professional scepticism in relation to such estimates.
Although partially driven by changes in accounting standards affecting the use of estimates in accounting for loan provisions and insurance contracts, the standard is intended to apply to all estimates and all audits and sets out a scalable, risk-based approach.
ISA (UK) 570 Going Concern
ISA (UK) 570 (Revised September 2019) Going Concern increases the work auditors are required to do when assessing whether an entity is a going concern. Auditors are required to identify events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and whether or not a material uncertainty related to going concern exists. Auditors then need to gather sufficient and appropriate audit evidence to enable them to conclude on management’s going concern assumption.
The FRC Guidance suggests that all companies (and therefore their audit committees) need to consider going concern and potential material uncertainties for a period of at least 12 months from the date that the financial statements are authorised for issue. They need to consider this in the light of the true and fair requirement under CA 2006, s. 393, and the wider concept of solvency and liquidity that are required in the assessment of risk and uncertainty for the company.