Accountants digest - april 2017

About the authors
This digest was compiled and edited by
Julia Bowyer ACA, the Accounting and Audit
Content Manager at Wolters Kluwer UK. The
contributors are set out on the next page.
Contents
1 Introduction and purpose of this digest 3
2 Governance: dealing with risk and
uncertainty 3
3 Accounting 6
4 IFRS Financial reporting 14
5 Audit – thresholds may shift post-Brexit 22
6 Potential tax and VAT changes 24
7 Brexit: EU nationals working in the UK 26
Issue 628
April 2017
Throughout this Digest the male pronoun is used to cover references to both the male and female.
The law is stated as at 31 March 2017.
Brexit Implications for
Accountants
Accountants’ Digest

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Issue 628 | April 2017 Brexit Implications for Accountants
Contributors
Sara White is Editor of Accountancy and CCH Daily and Amy Austin is Editorial Assistant at CCH Daily, Wolters
Kluwer UK. CCH Daily is the essential source of technical news, analysis and insight for the accountancy, tax and audit
professions that can also be used to earn you CPD.
Malcolm Finn FCA is global financial controller at Costa Coffee, part of the Whitbread Group. He joined Costa in 2015
from Big Four firm EY where he was an advisory director working with CFOs and the senior finance leadership of listed
multinationals. His particular focus at the firm was on complex groups with global scale undergoing strategic change and
renewal, finance transformation, complex transactions and readiness for new regulations.
Mike Cowan is a UK executive director and responsible for developing a recent EY report on Finance in a 4.0 world, which
looked at the role of the CFO and finance function in what the World Economic Forum refer to as Industry 4.0 – the 4th
Industrial Revolution. He is a qualified chartered accountant and brings over 20 years partner level experience working
with blue chip private and public sector organisations to improve their finance functions.
Mark Wearden MSc FCCA FCIS is an experienced consultant and lecturer who has worked extensively with directors
and senior managers from a wide range of different type and size of organisation. Mark is Chairman of the ACCA Global
Forum for Governance, Risk and Performance; an external exam assessor for ICSA, a judge for the ICSA annual reporting
awards and a Senior Lecturer in Corporate Finance and Corporate Governance at the University of Lincoln.
Andrew Marshall is an audit partner at KPMG. For many years he specialised in the real estate, construction, business
services and transport sectors. He is KPMG UK’s senior technical partner and has been with the firm for 30 years. He is
a regular contributor to CCH Daily and Accountancy magazine.
Armaghan Haq FCA is head of accounting policy for retail, consumer finance and group operations divisions of Lloyds
Banking Group, responsible for ensuring technical accounting risks are identified, assessed, prioritised and managed
effectively across the three divisions. The views expressed in this article are solely those of the author in his private
capacity and do not constitute professional advice.
David Stein is the editor of Company Reporting at Wolters Kluwer UK. Company Reporting products have been
influential in monitoring the development of IFRS reporting for over two decades. This high-value, independent research
service reports on the constantly changing financial reporting practice of public companies, with a focus on S&P Europe
350 and UK FTSE 350.
Matthew Stallabrass FCA is corporate business and audit partner at national audit, tax and advisory firm Crowe
Clark Whitehill. His experience includes international groups with turnover in excess of £3bn and listed entities with
market capitalisation in excess of £500m. Matthew works with clients reporting under both UKGAAP and IFRS and has
experience in advising clients on the transition process.
George Bull is RSM’s senior tax partner. Described by The Times newspaper as the firm’s ’tax guru’, George is primarily
involved in providing leading-edge business and taxation advice to the legal profession. He firmly believes that tax
systems should ‘look as though they were designed to be that way’, being fair, clear, certain and proportionate in their
impact. As most tax systems fall short of this ideal, George works closely with clients to explain complex tax issues
simply, producing workable solutions to difficult problems.
Pat Sweet is the online reporter at CCH Daily and Accountancy, covering news stories as they happen each day. With
a background in specialist publications, Pat has written about the management consultancy and IT sectors, and is now
focused on developments in the accounting and finance markets.
Stuart Chamberlain is an Employment law specialist for a range of on-line and digital products at Wolters Kluwer,
including Croner-i.

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Brexit Implications for Accountants Issue 628 | April 2017
1 Introduction and purpose of this digest
Following the triggering of Article 50 on 29 March 2017 starting the negotiating process for the UK to leave the EU, this
digest will guide you around the breadth of implications facing accountants, including corporate governance, audit,
accounting, tax, VAT and employment. It pulls together articles and papers from various sources here at Wolters Kluwer
with the aim of considering the following questions:
• Governance: How are firms and clients dealing with risk and uncertainty so they stay ahead of the game?
• Accounting: What might happen to the UK accounting framework and what accounting issues are already arising in
practice?
• Reporting: How have companies disclosed the risk and impact of Brexit so far?
• Audit: How may audit thresholds and regulation change?
• Tax and VAT: What are the key likely changes in tax and VAT to consider at this stage?
• Employees: Have we considered the issues for employees including pensions, tax and the impact for EU citizens in
the UK?
You can continue to keep up to date with developments by following the dedicated Brexit page on CCH Daily and signing
up to Wolters Kluwer services such as Company Reporting and Croner-i.
2 Governance: dealing with risk and uncertainty
Organisational culture has increasingly been the business topic of recent months. Its influence on risk, and its
relevance for regulators and investors, is becoming increasingly tangible. This section contains an article for
CCH Daily by Malcolm Finn, financial controller at Costa Coffee and Mike Cowan, head of Finance 4.0 at EY.
They consider the significance of culture in the context of the organisation’s finance function, and how culture is
key to overall risk management. This is followed by an extract from The PracticalGuide forAuditCommittees by
Mark Wearden.
2.1 Culture, financial controls and risk management in a Brexit world
2.1.1 The uncertainty of uncertainty
Whatever your personal views, recent months have heralded a period of considerable uncertainty. Macro factors of
currency, geo-political risk, fiscal policies, the economy in its widest sense and even levels of consumer confidence have
demonstrated the uncertainty of uncertainty.
Oscillation between hard Brexit and soft Brexit, and the recent US elections, to name two events, have resulted in
heightened levels of volatility. This poses a new risk landscape, which companies will need to navigate. The finance
function and corporate culture will have a key part to play.
2.1.2 CFO agenda and potential accounting implications
In times of uncertainty and volatility, there can sometimes be a decline in risk appetite. Chief financial officers
(CFOs) will have considered their revenue and operating models including customers, markets, supply chain, workforce,
and input costs as well as investment choices.
Significant and sudden shifts in foreign exchange rates, prices and indices may have certain accounting consequences
including fair values, valuation of inventories, impairment analysis, pension valuation, and recoverability of assets.
Organisations may need to consider the continued appropriateness of accounting policies and judgments.
Close reading of contracts may yet reveal that some have Brexit scenario break clauses.
2.1.3 Impact on finance and treasury functions
This changing environment makes it more important than ever that organisations have confidence in their ability to
properly respond to unforeseen challenges and effectively implement strategies. This requires first-rate decision making
and frontline behaviours that align with leadership’s intentions.
Yet, it is easy to forget that organisations are but collectives of individuals, each of whom has anxieties and ambitions,
and each of whom is affected and influenced by the environments in which they work and the stakeholders that they

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serve. Gaining confidence over the frontline individuals’ decision making and behaviours requires an understanding of the
cultures that help shape those environments.
The recent economic turbulence has been particularly tangible for finance and treasury functions. With heightened
importance of finance and treasury decision making comes an increasing responsibility for leadership to fully understand
how culture influences it.
This is particularly challenging given the inherent pressures in managing and messaging to finance’s diverse range
of stakeholders. One of the key risks in this situation is rationalising unfavourable decisions – where, as a result of
individuals managing a range of stakeholders, they feel constrained in speaking up or encouraged to ‘play down’ difficult
news. This may cause good people to rationalise misleading communication.
The other element to consider is how finance’s culture interacts with the multitude of dimensions and dynamics that
exist across the wider organisational culture.
Cross-functional working is now commonplace in many organisations. Fear or blame cultures, or cultures that exhibit
silo mentalities, can be particularly prohibitive for finance functions since they are critically dependent upon wider
business information to successfully manage risk, and often house the expertise that other parts of the business require
to facilitate key decision making and forecasting.
A finance function that is hyper-connected across the organisation and can work more effectively within the diverse
aspects of the larger organisational culture can add competitive advantage.
In short, culture is key to a business’s ability to intelligently develop and implement the right strategy to weather
the uncertainty in the market. Organisations that encourage open, constructive and integrative discussions and
a collaborative ‘big picture’ approach, based on diverse relationships throughout the organisation, are likely to be more
resilient.
2.1.4 Influencing behaviour
Most of us intuitively understand that the political and social dimensions to our jobs influence the way we act. For this
reason, culture has been increasingly recognised as a significant factor in the strength of an organisation’s overall control
environment. That is not to diminish the importance of controls and compliance.
Rather, it is a basic acknowledgment that even the best compliance frameworks have unforeseen gaps, and that
individuals are more likely to make good decisions when they are acting within cultures that are aligned with the
organisation’s purpose and values.
Culture is the invisible hand that guides people to do the right thing even when no one is watching. Organisations that
focus on rules alone are likely to find that they have not done enough to drive the behaviours they desire their people to
exhibit.
In a recently published study, Corporate culture and the role of boards, the Financial Reporting Council (FRC) addressed
the link between culture and risk head on. It laid out leadership’s direct responsibility for embedding at all levels a culture
where behaviours, purpose and values are aligned, for assessing culture and for taking immediate action to address gaps
and misalignments.
Equally as important, the FRC also urged that ‘codes of conduct are a baseline; a culture is created by what you do
rather than what you say’. Most finance and treasury functions will invest significant time focusing on externally visible
corporate behaviours and communications, but often overlook the ‘invisible norms’ that dominate interactions within
treasury and with other functions, which are of equal importance.
Embedding an open culture allows risks and opportunities from a wider range of sources to surface and enables
appropriate consideration by all relevant stakeholders. Clearly the traditional methods for managing risk and
performance will always have a high level of importance, but leadership should recognise that culture has a significant
and demonstrated impact as well.

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2.1.5 Assessing culture
Culture can be hard to define, observe and measure. Yet, as the FRC has urged, define, observe and measure we must.
The problem is moving on from talking about culture to measuring it and understanding its influence on behaviours and
ultimately performance.
Recent regulatory focus will provide further impetus for major listed companies to give culture more attention. Investors
and analysts are also taking culture seriously – they are already demanding more and better information on culture
beyond platitudes and employee engagement scores.
With the uncertainty of our times, these circumstances dictate that companies cannot afford to delay taking real,
concrete steps toward tackling their cultures. As the FRC notes, ‘objective, evidence‐based tools are already available
which are capable of layering and presenting information [on culture],’ helping finally make the intangible, tangible.
Organisations, and finance and treasury functions in particular, need to begin utilising this technology to best arm
themselves for the road ahead.
2.2 CCH Practical Guide for Audit Committees: Strategy, risk and control
The CCH PracticalGuide forAuditCommittees is aimed at people from any type or size of organisation who are involved
with or need to know more about how to structure and operate an audit committee, including internal and external
auditors, audit committee members and company directors. In Section 6, Mark Wearden covers strategy, risk and
control including setting out the theory behind a ‘triangular approach’ to effective governance, which will become even
more important for organisations to consider in light of Brexit.
He then sets out the following questions for audit committees to consider in relation to risk awareness in their own
organisations.
• Are we looking backwards or forwards?
–– How much time do we spend on strategic consideration?
–– How far ahead do we look?
–– Is the past used to inform the future?
• Who owns the organisational risks?
–– Does the audit committee have a clear remit?
–– Do the other directors recognise their accountability?
–– Is there too much reliance on the audit committee?
• How far are we prepared to go?
–– Do we understand our risk appetite?
–– Have we determined our risk tolerance parameters?
–– When did we last test the boundaries?
• Are the risks aligned to the strategy?
–– Do we recognise the triangulation of strategy, risk and control?
–– Who determines the strategy?
–– Who identifies the risks?
• How do we know when something is going wrong?
–– Are the reporting lines clear?
–– Is the transparency evident?
–– Can we trust the key players at all levels?

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3 Accounting
3.1 UK Accounting framework: what does Brexit mean for accounting standards?
The Brexit vote could have long-term implications for the use of IFRS in the UK. Drafted in December 2016, Andrew
Marshall FCA, senior technical partner at KPMG considers the pitfalls and potential options for UK accounting
standards once the UK leaves the EU.
As the Brexit debate rumbles on, one of the questions that we are frequently asked is what Brexit might mean for
accounting standards in the UK and whether it could lead to the demise of International Financial Reporting Standards
(IFRS) in the UK and the return of UK GAAP.
One answer is that the UK government and European Commission have more important things to negotiate as they plot
their route to a hard or soft Brexit. However, at the same time, there are vocal groups who have concerns with certain
aspects of IFRS and may use the opportunity to lobby for just such a change.
So first of all the facts. We are still in the EU for the time being, so there will, for certain, be no change to the
requirements in the next two years or so until Brexit eventually takes place.
Second, the EU-wide requirement for listed companies to use EU-adopted IFRS is now embedded into our own law in
the CompaniesAct 2006; it is also worth noting that this falls into many places and unpicking the requirement will take
much detailed redrafting of legislation.
Third, what most people now known as old UK GAAP has passed into history and private companies (with the exception
of small ones) are now applying FRS 102 Financial Reporting Standard applicable in the UK and Ireland, which is closely
aligned with the IFRS for small and medium-sized entities. So any change would require a lot of unpicking.
3.1.1 Potential pitfalls
Taking all this into account, it would seem that the following potential options lie open to the UK:
• move to full IFRS – which would align with global requirements, but may indicate acceptance of all standards
whether we like them or not, and potentially remove bargaining power with the International Accounting Standards
Board (IASB);
• continue with EU-adopted IFRS – which would seem unlikely to be popular, given we are likely to have no influence
over the EU endorsement process; However, it may be necessary in order to access EU capital markets and the
single market more generally; for instance, Norway applies EU-adopted IFRS;
• bring in our own endorsement process and have UK-adopted IFRS, which may as noted above complicate access to
EU markets post-Brexit, but potentially also to other capital markets such as the US; or
• revert back to UK GAAP, which could lead us to fall into all of the above pitfalls.
While all of these routes have their pros and cons, it feels right now that a UK-adopted IFRS is likely to be the preferred
route. This is after all a route we already follow with auditing standards. Many have voiced a desire for any endorsement
process to be light touch.
3.1.2 Unexpected repercussions
Aside from these possible changes, there are a number of more subtle impacts which may be felt over the longer
term. For instance, the UK has been a strong advocate for IFRS within the EU. At times this has been in opposition to
other countries which have sought to water down or reject some IFRS or aspects thereof in the EU. Without the UK’s
voice, there is a risk that the EU could take a more antagonistic position on certain standards than it has previously done.
Another issue, which has common ground with many other concerns on Brexit, is that the UK’s influence on IFRS will
diminish. Whereas the EU is listened to as perhaps the major sponsor of IFRS, the UK on its own will be battling to be
heard with many other global voices. A contrary view is that the UK should remain a major capital market and hence its
view will still be listened to.
As with much to do with Brexit, it is difficult right now to second guess where we will end up, but in and around our
profession this debate is likely to increase over the next couple of years.

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3.2 Accounting example in practice – IAS 21
Accounting for currency fluctuations under IAS 21 The EffectsofChanges in Foreign Exchange Rate, is a balancing act
in the Brexit world, says Armaghan Haq, head of accounting policy, retail at Lloyds Banking Group.
The UK’s vote to leave the EU will directly impact the results and financial positions of many UK companies with
international operations (particularly European) and multinationals operating in the UK. Following the exit vote on
23 June, within a week sterling had fallen to its lowest level in more than 30 years against the US dollar.
Although imports become more expensive, it is good news for exporters as their products become cheaper for overseas
customers and thus more competitive. So it is not necessarily a bad thing as long as the fall does not go too far and the
Bank of England steps in if this seems to be happening.
The fall in sterling should be accounted for under IAS 21 The Effects ofChanges in Foreign Exchange Rates, and has serious
implications for UK-based companies undertaking transactions from buying or selling goods or services, borrowing or
lending money, acquiring or disposing of assets, and incurring and settling liabilities in US dollars.
3.2.1 Volatile exchange rate
As demonstrated in example 1 below, volatile exchange rates affect the value of companies’ assets and liabilities
denominated in foreign currencies and have an impact on the operating profit. What is not generally understood is that
in this age of global competition, exchange rates also affect the operating profits of companies in globally competitive
industries, whether or not they export their products.
In fact, volatility in exchange rates can often have a business effect on the operating profit of companies that have
no foreign operations or exports but that face important foreign competition in their domestic market. The initial
recognition of transactions undertaken in the aftermath of the Brexit vote and denominated in a foreign currency
(irrespective of whether monetary or non-monetary items) has to be recorded on initial recognition in sterling by
applying the spot exchange rate at the date of the transaction.
Where there are a large number of similar size transactions, an average rate is used as an approximation to the actual
spot rate. The period used for the calculation is dependent upon the underlying stability of exchange rates. Given the
volatility of exchange rates after the result, it may be appropriate to calculate an average rate for a shorter period to
ensure that these are a close approximation of the actual rates.
3.2.2 Subsequent measurement
A foreign currency transaction may give rise to assets and liabilities that are denominated in a foreign currency. The
procedure for translating such assets and liabilities at each balance sheet date will depend on whether they are monetary
or non-monetary.
IAS 21 requires entities to translate foreign currency monetary items outstanding at the balance sheet date using the
spot exchange rate at that date.
It should be noted that a rate of exchange that is fixed under the terms of the relevant contract (intended to avoid
volatility) cannot be used to translate monetary assets and liabilities. Translating a monetary item at the contracted
rate under the terms of a relevant contract is a form of hedge accounting which is not permitted under IAS 39 Financial
Instruments: Recognition and Measurement.
For monetary items, which arise from a foreign currency transaction, a change in exchange rate between the transaction
date and the date of settlement results in an exchange difference. The accounting is best illustrated through a number of
illustrations.
The first instance considers the impact on the income statement of translation of monetary items. Exchange differences
arising on the settlement or on subsequent retranslation of translating monetary items are recognised in profit or loss
in the period in which they arise. In example 1, the exchange differences on settlement on 29 June 2016 is a loss of
£138,169 and on retranslation on 30 June 2016 is a loss of £133,913. The deterioration in the sterling value, therefore,
has an adverse impact on results if it has monetary assets and liabilities denominated in foreign currencies.

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Non-monetary assets that are measured at fair value and are denominated in a foreign currency are translated using
the exchange rates at the date when the fair value was determined. Consequently, changes in fair value include foreign
exchange differences arising on the retranslation of the opening foreign currency fair value.
Non-monetary items that are not remeasured at fair value are initially recorded at historical cost and no retranslation of
the asset is required at subsequent balance sheet dates. However, there may still be an impact of exchange rate changes
on such assets.
3.2.3 Income statement
The exposure of the income statement to currency fluctuations can be effectively managed in a number of ways. Under
International Financial Reporting Standards (IFRS), the following exchange differences are not reported in the income
statement:
• a monetary item that is designated as a hedging instrument in a cash flow hedge. Any exchange difference that
forms part of the gain or loss on the hedging instrument is recognised in other comprehensive income;
• a monetary item that is designated as a hedge of a net investment in consolidated financial statements. The
exchange difference on the hedging instrument that is considered to be an effective hedge is recognised in
other comprehensive income; and
• an exchange difference arising on a long-term loan or receivable that is designated as an extension of, or reduction,
in an entity’s net investment in a foreign operation is also taken to other comprehensive income on consolidation.
There is likely to be a protracted period of negotiation to finalise the post-Brexit landscape. During this time, companies
will have an exposure to the fluctuations in exchange rates and will need to develop strategies to manage the impact on
their income statement. It may be appropriate for the management to consider ring-fencing the income statement by
adopting the above options individually or in combination.
Example 1: Treatment of a forex denominated capital purchase
On 23 June 2016, a UK company purchases plant for use in the UK from a US entity for $2,000,000. The exchange
rate on 23 June 2016 is £1 = $1.512. The purchase price is to be settled on 29 June 2016, although the delivery is
made immediately.
On purchase, the UK company records both the plant and the monetary liability at £1,322,751 (2,000,000/1.512).
As the plant is not a monetary item, the UK company will not need to translate the plant any further.
At the settlement date of 29 June 2016, the exchange rate is £1 = $1.369. The actual amount the UK company will
pay to settle the liability is therefore £1,460,920 (2,000,000/1.369). The entity should include the loss on exchange
of £138,169 (that is, £1,322,751– £1,460,920) in arriving at its profit or loss.
Let us now assume that the settlement date is in September and the year end of the UK company is 30 June 2016
when the exchange rate was 1.373. IAS 21 requires entities to translate foreign currency monetary items outstanding
at the balance sheet date using the spot exchange rate at that date. The liability at 30 June 2016 will accordingly
be translated and restated at £1,456,664 (£2,000,000/1.373). The entity should include the loss on exchange of
£133,913 (that is, £1,322,751 – £1,456,664) in arriving at its profit or loss.

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Example 2: Treatment of non-monetary items that are fair valued
A UK entity buys a financial instrument on 23 June 2016 for $2m (£1.3m) and designates it as FVTPL (fair valued
through P/L). On 30 June (balance date), the fair value of the financial instrument is $2.1m. The exchange rate
against the dollar had fallen from 1.512 on 23 June 2016 to 1.373 on 30 June 2016.
US$ Rate £ £
Purchased (23/06/2016) 2,000,000.00 1.512 1,322,751.32
Valuation (30/06/2016) 2,100,000.00 1.373 1,529,497.45
Total fair value gain (FVTPL) 206,746.13
Composition of the fair value gain FVTPL
Change in underlying FV 100,000.00 1.373 72,833.21
Exchange gain Initial recognition at closing rate 2,000,000.00 1.373 1,456,664.24
Initial recognition at transaction rate 2,000,000.00 1.512 1,322,751.32
Exchange gain 133,912.92
Total fair value gain (FVTPL) 206,746.13
It can be seen from above that the total fair value gain comprises the underlying gain of £72,833 and exchange gain
of £133,912.
When a gain or loss on a non-monetary item is recognised directly in other comprehensive income (OCI), any
exchange component of that gain or loss is also recognised directly in OCI.
Example 3: Treatment of non-monetary items that are not fair valued
A UK entity has a property (land) located in the US, which was acquired at a cost of $2m when the exchange
rate was £1 = $1.5. The property is carried at cost. At the balance sheet date, the recoverable amount of the
property as a result of an impairment review amounted to $1.850m. The exchange rate at the balance sheet date
(30 June 2016) was £1 = $1.373.
US$ Rate £ £
Purchased 2,000,000.00 1.500 1,333,333.33
Valuation (30/06/2016) 1,850,000.00 1.373 1,347,414.42
14,081.09
Impairment loss of the underlying asset 150,000.00 1.373 109,249.82
Exchange gain Initial recognition at closing rate 2,000,000.00 1.373 1,456,664.24
Initial recognition at transaction rate 2,000,000.00 1.500 1,333,333.33
Exchange gain 123,330.91
14,081.09
It can be seen from the above illustration that despite a diminution in value of the property by £150,000, there is no
impairment loss as the underlying impairment loss is entirely compensated by the exchange gain.

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3.3 Brexit and the implications of a volatile Sterling – some solutions
3.3.1 Introduction
The ‘Yes’ vote in the referendum on Brexit that was held on 23 June 2016 caused the foreign exchange (FX) rates to
become volatile. Such volatility may considerably affect the results and financial positions of many UK companies with
international operations and multinationals that operate in the UK. This article addresses some of solutions available to
manage this volatility.
Under IAS 21, the exchange differences arising on the settlement of monetary items, or on retranslating the monetary
items as at the balance date, are recognised in profit or loss account. However, not all exchange differences arising on
monetary items are recognised in the profit or loss account.
There are the following exceptions:
• where a monetary item is designated as a hedging instrument in a cash flow hedge, any exchange difference that
forms part of the gain or loss on the hedging instrument is recognised in other comprehensive income;
• where a monetary item is designated as a hedge of a net investment in consolidated financial statements, any
exchange difference on the hedging instrument that is considered to be an effective hedge is recognised in
other comprehensive income; and
• where a monetary item forms part of the net investment in a foreign operation in the consolidated financial
statements.
Of the above three exceptions, the first two are hedging transactions also addressed under IAS 39 Financial Instruments,
Recognition and Measurement and the third is addressed under IAS 21. It should be noted that as IFRS 9 Financial
Instruments is not yet applicable, this article does not deal with issues that may arise from the application of IFRS 9.
The three exceptions are addressed below.
3.3.2 Hedging instrument in a cash flow hedge
A ‘cash flow hedge’ is a hedge of the exposure to variability in cash flows that is attributable to a particular risk
associated with a recognised asset or liability or a highly probable forecast transaction and could affect profit or loss.
[IAS 39.86(b)]. Examples include:
• An entity with a highly probable sale of goods contracts a forward exchange contract to ‘fix’ the functional currency
price of the goods, thereby hedging the risk of changes in functional currency amount of the sale due to changes in
foreign exchange rates.
• An entity enters into a forward contract to hedge a foreign currency receivable or a payable due to be settled in,
say, six months’ time, thereby hedging the risk of changes in the amount receivable or payable on settlement in
six months’ time due to changes in the foreign exchange rates.
3.3.3 Hedge of a net investment in consolidated financial statements
An entity may decide to hedge against the effects of changes in exchange rates in its net investment in a foreign
operation. Hedging could be done by taking out a foreign currency borrowing or a forward contract to hedge the net
investment. Hedging a net investment in a foreign operation can only be carried out at the consolidation level, because
the net assets of the foreign operation are reported in the reporting entity’s consolidated financial statements. The
hedging criteria and documentation must be complied with. Upon disposal of the foreign operations, any exchange
differences recognised in other comprehensive income are reclassified to profit or loss account.
The IASB has issued IFRIC 16, Hedges of a Net Investment in a ForeignOperation, for specific guidance.
3.3.4 Monetary item forming part of the net investment in a foreign operation in the consolidated financial
statements
This exception is the simplest and is addressed in greater detail.

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Under IAS 21.32, the exchange differences arising on monetary items that form part of a reporting entity’s net
investment in a foreign operation is treated as follows:
• in the separate financial statements of the foreign operation, such exchange differences are recognised in the profit
or loss account;
• in the consolidated financial statements that include the foreign operation, such exchange differences are recognised
initially in a separate component of other comprehensive income and recognised in the profit or loss on disposal of
the net investment.
The net investment in a foreign operation is the interest in the net assets of that operation [IAS 21.8]. It comprises long-
term loans and receivables only if the settlement is neither planned nor likely to occur in the foreseeable future. These
monetary items would then be akin to an equity interest and must be regarded as permanent as equity. Consequently,
it would be inappropriate to include the exchange differences arising on the retranslation of such monetary items in
consolidated profit or loss account when exchange difference arising on equivalent financing with equity capital is taken
to other comprehensive income on consolidation. Further, there should not be any impact on consolidated profit or loss
because such monetary items have no impact on group cash flows, unless these are realised.
Let us consider a situation, where there is a loan to a foreign operation that is repayable on demand. This loan may
be regarded as short term unless demonstrably there is no intent or expectation to demand repayment and this loan
is continuously rolled over irrespective of the foreign operations ability to repay the loan. Such a loan demonstrates
the attributes of equity. Compare this with a loan with a specified maturity (say 10 to 15 years) that the management
intends to call in on maturity. This loan will not be regarded as equity despite being a long-term loan. The management
must document their intention and have auditable evidence supporting their assertions.
It should be noted that IAS 21.15 excludes trade receivables and trade payables from the scope of the above because
such balances usually comprise large number of transactions. Whilst the aggregate balances may not significantly
change, each individual transaction is settled and replaced by a new transaction. Therefore, the settlement is always
intended and consequently the exchange gains and losses should be recognised in the consolidated profit or loss account
in the period arising.
The long-term loans need to be designated by the parent, as part of its net investment in the foreign operation.
The long-term loans may be designated partway through the year. The exchange differences arising to the date of
designation should be recognised in the consolidated profit or loss account. The exchange differences arising subsequent
to designation should be recognised in the consolidated comprehensive income. The designation is documented (with
supporting evidence) and reviewed on a periodic basis to ensure that it remains current with management intentions and
underlying circumstances.
It should be noted that it is not just the parent that may have loans (payable or receivable) designated as net
investment in the foreign operation for the exchange differences on translation of the monetary item to be recognised
in consolidated comprehensive income. Any member of the group may do so in respect of its monetary items receivable
from or payable to a foreign operation. The members of the group includes parent, fellow subsidiaries, etc. but excludes
associates and joint ventures. Also interest payments, if any, on monetary items receivable from or payable to a foreign
operation are excluded because these cannot be regarded as the settlement of the loan.
3.3.5 Illustrations
To illustrate the above principles, a number of situations are considered.
The exchange rates used in these illustrations are US$ 1.30 and US$ 1.50 to £1 at the end of 31 December 20X1 and
31 December 20X2, respectively. Further, in all the below situations, the lender has notified the borrower that no
repayments of the amount outstanding will be requested in the foreseeable future.

12
Also assume that the financial year of all the entities set out in the below illustrations end on 31 December.
Illustration 1 – Loan is denominated in US$
Parent A lent US$ 1m to foreign subsidiary B that has been outstanding for some time. Assume the functional
currency of A and B is sterling and US$, respectively.
There is no exchange difference in the foreign subsidiary because the loan is denominated in US$.
Exchange difference on the long-term loan in the books of Parent:
£
Opening rate – US$ 1m @ 1.30 769,231
Closing rate – US$ 1m @ 1.50 666,667
Exchange loss £102,564
The exchange loss of £102,564 is dealt with in the accounts of Parent A, Foreign Subsidiary B and the Consolidated
Accounts, as follows:
Caption Parent
A
Foreign Subsidiary
B
Consolidated
Accounts
Functional currency/Presentation currency £ US$ £
Recognised in profit or loss account £102,564 N/A Nil
Recognised in other comprehensive income Nil N/A £102,564
Illustration 2 – Loan is denominated in £
Facts are the same as illustration 1, except Parent A lent £1m to Foreign Subsidiary B.
There is no exchange difference in the Parent because the loan is denominated in £.
Exchange difference on the long-term loan in the books of Foreign Subsidiary B:
US$
Opening rate – £1m @ 1.30 1,300,000
Closing rate – £1m @ 1.50 1,500,000
Exchange loss on loan payable by B US$200,000
Exchange loss in sterling (at closing rate of 1.50) £133,333
The exchange loss of US$ 200,000 (£133,333) is dealt with in the accounts of Parent A, Foreign Subsidiary B and the
Consolidated Accounts, as follows:
Caption Parent
A
Foreign subsidiary
B
Consolidated
Accounts
Recognised in profit or loss account N/A US$200,000 Nil
Recognised in other comprehensive income N/A Nil £133,333
In the above two illustrations, the monetary item forming part of the net investment is denominated in the functional
currency of either the reporting entity or the foreign operation. The question arises as to whether the treatment
would be different where the monetary item forming part of the net investment in a foreign operation is denominated
in a currency that is different from the functional currency of either the reporting entity or the foreign operation.
The answer is no; under IAS 21, the accounting treatment addressed above does not depend on the currency in which the
monetary item is denominated.

13
Illustration 3 – Loan is denominated in Euro
Parent A lent €1m to foreign subsidiary B that has been outstanding for some time. Assume the functional currency
of A and B is sterling and US$, respectively.
Assume the rates are as follows:
€1.17 and €1.40 to £1 at the end of 31 December 20X1 and 31 December 20X2.
US$1.05 and US$1.07 to €1 at the end of 31 December 20X1 and 31 December 20X2.
US$1.30 and US$1.50 to £1 at the end of 31 December 20X1 and 31 December 20X2.
Exchange difference on the long-term loan in the books of Parent, on conversion to sterling:
Opening rate – €1m @ 1.17 854,700
Closing rate – €1m @ 1.40 714,285
Exchange loss £140,415
Exchange difference on the long-term loan in the books of Foreign Subsidiary B, on conversion to US$.
US$
Opening rate – €1m @ 1.05 1,050,000
Closing rate – €1m @ 1.07 1,070,000
Exchange loss on loan payable by B US$20,000
Exchange loss in sterling (at closing rate of 1.50) £13,333
The exchange loss is dealt with in the accounts of Parent A, Foreign Subsidiary B and the Consolidated Accounts,
as follows:
Caption Parent
A
Foreign Subsidiary
B
Consolidated
Accounts
Recognised in profit or loss account £140,415 US$20,000 Nil
Recognised in other comprehensive income Nil Nil
£153,748
(£140,415 + £13,333)
Following Brexit, entities that previously did not actively manage the currency volatility are now considering doing so,
and those entities that previously managed these risks are considering more exotic currency volatility management
programs. This article, which sets out an overview of options available, from hedging to designation of net investments
in foreign operations, provides only a general description of options available and does not constitute legal or accounting
advice. Whilst hedging is more complex, the designation of monetary items as net investment in foreign operations is
relatively straight forward and insulates the profit or loss from currency volatility at consolidated level.
There is likely to be a protracted period of negotiation and there is significant ambiguity as to whether there will be
hard or soft Brexit. Companies will continue to have exposure to the fluctuations in exchange rates and consequently
would need to develop strategies to manage the impact on their profit or loss account. The management may therefore
consider adopting the above options individually or in combination.

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4 IFRS Financial reporting
David Stein, editor of Company Reporting (CR), has reviewed the accounts of IFRS reporters in 2016 who mention
Brexit, whether in the strategic report or when disclosing impacts already felt in ‘back half’ financials. The analysis is
set out below and the extracts referred to are available on the Company Reporting website in the related Emerging
Issues report.
CR Emerging Issues summarise changes in companies’ reporting practice and collate changes identified previously
in CR Monitors. These reports address the most immediate issues facing companies reporting under IFRS, identify
trends and highlight areas of evolving or divergent practices. The sample of companies covered reflects a mix of
auditor and industry classification.
This report focuses on the disclosures given by companies in relation to Brexit within their annual reports both in
terms of the future and current impacts.
Companies make reference to Brexit causing uncertainty and risk and that is likely to continue for years to come.
4.1 Introduction
The referendum vote to leave the European Union (EU) has undoubtedly led to uncertainty for business and will
potentially have far reaching impacts for companies from many different industries. This report, pulled together in
March 2017, focuses on the information that companies have disclosed within their annual reports during the latter half
of 2016. It sets out disclosures around risk as well as the disclosure of Brexit impacts which have already been felt and
the resulting ramifications.
4.2 Summary
We reviewed 47 London Stock Exchange listed companies, drawn from a varied range of industries, with year ends
between 31 March and 2 October 2016 that refer to the Brexit referendum in their annual reports. Such references are
included within the principal risks section of the strategic report by 39 companies. The format of such disclosures varies
with five companies identifying Brexit as a separate principal risk area. However, most companies make reference to
Brexit within their discussions of other principal risk factors such as the economic environment, the status of regulation,
financial conditions including foreign exchange, market or customer confidence and the cost effective availability of
resources including personnel. There is limited specific disclosure of Brexit in audit committee and audit reports despite
a push for consistency of disclosure with the strategic report by the Financial Reporting Council (FRC).
There are also references to more immediate impacts. The devaluation of sterling against other currencies has already
impacted the results of certain companies in respect of the translation of the results of foreign subsidiaries and
transactions with foreign customers and suppliers. Three companies have also highlighted the impact of Brexit on
financial statement valuations such as properties, inventories and pensions. Two others have highlighted it as having
a post balance sheet impact on financing policies. Five companies refer to the uncertainty and volatility caused by the
Brexit vote impacting the setting of variable remuneration targets in their directors’ remuneration reports.
4.3 Reporting framework
The FRC in its document Reminders for half-yearly and annual financial reports following the EU referendum
gives specific guidance in respect of the CompaniesAct 2006 requirement for companies to include within their
strategic reports a description of the principal risks and uncertainties faced. The document states that the reader should
be able to understand how disclosed risks and uncertainties are relevant giving the specific facts and circumstances
of the company and further states that there is an expectation for companies to explain any steps they are taking to
manage or mitigate those risks. The FRC notes that volatility in the markets following the referendum may have an
impact on balance sheet values at 30 June 2016 or at subsequent reporting dates. Further, in respect of foreign exchange
risk for example, companies may wish to consider the potential gains and losses arising from transactions in foreign
currencies.
In terms of ‘back half’ reporting, the key IFRS standards that are most relevant to Brexit and its impact include: IAS 1
Presentation of Financial Statements; IAS 2 Inventories; IAS 8 Accounting Policies;Changes inAccounting Estimates

15
and Errors; IAS 10 Events after the Reporting Period; IAS 19 Employee Benefits; IAS 21 The Effects ofChanges in Foreign
Exchange Rates; IAS 36 Impairment ofAssets; IAS 37 Provisions,Contingent Liabilities andContingentAssets; IAS 39
Financial Instruments: Recognition and Measurement; IFRS 2 Share-based Payment and IFRS 13 FairValue Measurement.
4.4 Companies reviewed
The annual reports of the following 47 companies were reviewed including 14 companies which made reference to the
Brexit referendum in their annual reports that were published before the result of the 23 June vote was known:
Company Name Industry Reporting Date Publishing Date
Whitbread PLC Restaurants Bars 3 March 2016 25 April 2016
Land Securities Group plc Real Estate Investment
Trust
31 March 2016 16 May 2016
British Land Company plc Real Estate Investment
Trusts
31 March 2016 16 May 2016
SSE plc Conventional Electricity 31 March 2016 17 May 2016
3i Group plc Specialty Finance 31 March 2016 18 May 2016
National Grid plc Multi-utilities 31 March 2016 18 May 2016
Electrocomponents plc Industrial Suppliers 31 March 2016 19 May 2016
Mitie Group plc Business Support Services 31 March 2016 23 May 2016
Aveva Group plc Software 31 March 2016 24 May 2016
Babcock International
Group plc
Business Support Services 31 March 2016 24 May 2016
Marks and Spencer Group
plc
Broad-line Retailers 2 April 2016 24 May 2016
United Utilities Group plc Water 31 March 2016 25 May 2016
QinetiQ Group plc Defence 31 March 2016 26 May 2016
FirstGroup plc Travel Tourism 31 March 2016 14 June 2016
Greene King plc Restaurants Bars 1 May 2016 28 June 2016
Imagination Technologies
Group plc
Semiconductors 30 April 2016 5 July 2016
Sports Direct International
plc
Apparel Retailers 24 April 2016 7 July 2016
Stagecoach Group plc Travel Tourism 30 April 2016 8 July 2016
SuperGroup plc Clothing Accessories 30 April 2016 13 July 2016
IG Group Holdings plc Investment Services 31 May 2016 19 July 2016
Daejan Holdings plc Real Estate Holding
Development
31 March 2016 21 July 2016
Ryanair Holding plc Airlines 31 March 2016 22 July 2016
Renishaw plc Electronic Equipment 30 June 2016 27 July 2016
Sky plc Broadcasting
Entertainment
30 June 2016 27 July 2016
Diageo plc Distillers Vintners 30 June 2016 27 July 2016
Hays plc Business Training
Employment Agencies
30 June 2016 1 September 2016
Barratt Developments plc Home Construction 30 June 2016 6 September 2016
Hargreaves Lansdown plc Asset Managers 30 June 2016 6 September 2016

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Company Name Industry Reporting Date Publishing Date
Genus plc Biotechnology 30 June 2016 7 September 2016
Go-Ahead Group plc Travel Tourism 2 July 2016 8 September 2016
Dunelm Group plc Home Improvement
Retailers
2 July 2016 14 September 2016
Galliford Try plc Home Construction 30 June 2016 14 September 2016
Kier Group plc Heavy Construction 30 June 2016 21 September 2016
Wolseley plc Industrial Suppliers 31 July 2016 26 September 2016
Close Brothers Group plc Investment Services 31 July 2016 27 September 2016
Debenhams plc Broadline Retailer 3 September 2016 27 October 2016
EasyJet plc Airline 30 September 2016 14 November 2016
Fenner plc Industrial Machinery 31 August 2016 16 November 2016
Mitchells Butlers plc Restaurants Bars 24 September 2016 21 November 2016
Diploma plc Industrial Suppliers 30 September 2016 21 November 2016
Thomas Cook Group plc Travel Tourism 30 September 2016 22 November 2016
Marston’s plc Restaurants Bars 1 October 2016 24 November 2016
Britvic plc Soft Drinks 2 October 2016 29 November 2016
Brewin Dolphin Holdings
plc
Asset Managers 30 September 2016 29 November 2016
Sage Group plc Software 30 September 2016 29 November 2016
Grainger plc Real Estate Holding
Development
30 September 2016 1 December 2016
Victrex plc Specialty Chemicals 30 September 2016 6 December 2016
4.5 Analysis
4.5.1 Brexit identified as a separate principal risk area
Of the companies reviewed, 39 make reference to the EU referendum or its result when disclosing information in
respect of principal risks and uncertainties within their strategic reports. Of these companies, five (ThomasCook, EasyJet,
Ryanair, Dunelm and Grainger) identify Brexit specifically as an individual principal risk or area of uncertainty. Thomas
Cook simply states that the decision to leave the EU has a detrimental impact on its operations without giving further
detail. In respect of mitigation, the company states that it has established a Brexit working group to ensure all potential
implications have been sufficiently considered and that an ongoing dialogue will be maintained with the UK government
as exit plans gain clarity. The other four companies give more detailed information.
Ryanair within its discussion of Brexit as a principal risk area outlines why Brexit has so great a potential to impact its
business. It states that 28% of its revenues came from operations in the UK and that as a result of the Brexit vote there
will be renegotiation of arrangements between the EU and the UK, including freedom of movement, employment rules,
the status of the UK in relation to the EU open aviation market and the tax status of EU member state entities operating
in the UK. It goes into more detail in respect of a specific EU regulation which requires that air carriers registered in EU
member states be majority owned and effectively controlled by EU nationals. It states that if UK holders of its shares are
no longer considered EU nationals, the board of directors may have to take action to ensure continued compliance with
the previously mentioned regulation. It outlines the significant volatility in global stock markets and currency exchange
rate fluctuations. It explains that £ sterling has lost approximately 10% of its value against the US$ and the € since
the referendum. It explains further that for the remainder of the 2017 fiscal year taking account of timing differences
between the receipt of sterling denominated revenues and the payment of sterling denominated costs, it estimates that
for every one pence sterling movement in the EUR/GBP exchange rate it will impact its income by approximately €8m.

17
EasyJet (Extract 1: EasyJet Annual Report 2016 – Page 30) within its principal risk disclosures sub-classifies the impact
of EU exit as a risk factor which effects its compliance regulatory environment. It outlines that the risk is pertinent to
all six of its strategic aims which are to build number 1 and 2 network positions, a lean cost advantage, customer and
operational excellence, data and digital, revenue growth and to have the best people. It outlines further that the risk
of EU exit could actually impact its viability assessment. It states specifically that as a result of the Brexit vote, there
is uncertainty how its current market access rights will be affected and if it is unable to continue to fly its intra-EU
network, there would be a significant operational and financial impact. It states that in order to mitigate the risk, it is in
the process of registering an Air Operator Certificate in an EU territory to enable access to the European aviation market,
in as similar a way as today, in a post-Brexit landscape. In terms of addressing the risk, Easyjet discloses that it is actively
engaging with regulators, the UK government and the EU to secure European flying rights through the continuation of
a liberalised and deregulated aviation market across Europe.
Dunelm (Extract 2: Dunelm Annual Report 2016 – Page 23) like EasyJet outlines that Brexit risk (defined as failure to
anticipate and manage the potential impact of Britain leaving the EU) is linked to all of its strategic initiatives which
are to achieve like for like stores sales growth, new stores and home delivery. It further outlines performance indicators
linked to Brexit which are sales and gross margin. Mitigating actions include implementation of a plan to address
potential cost inflation arising from the fall of sterling, modelling of the impact of a short term recession on FY17 sales,
positioning its product range and marketing appropriately and identifying of potential profit protection opportunities.
Grainger (Extract 3: Grainger Annual Report 2016 – Page 33) in common with the previous three companies outlines
the possible negative impacts of Brexit on its strategy, stating that there could be increased construction costs, a fall in
asset and portfolio values, an inability to build a competitive private rental sector (PRS) portfolio, a lower demand for
its assets in certain locations, currency volatility and a reduction in the supply of requisite skilled labour. In relation to
mitigation, the company notes that although the economic implications resulting from the impact of Brexit are largely
beyond the control of the company:
• it has a proven ability to generate cash in uncertain economic periods;
• it holds appropriate levels of debt and maintains headroom;
• property portfolios are positioned within geographically diverse areas with PRS schemes targeted in locations with
robust levels of economic activity;
• the implementation of its PRS strategy is on target; and
• it is maintaining an open dialogue regarding the Brexit impact with key third parties, suppliers and industry bodies.
4.5.2 Brexit identified as a factor in economic principal risk area
The 13 companies that make reference to Brexit when discussing economic conditions as a principal risk factor are
3i, Barratt Developments, British Land,Close Brothers, Daejan, Diageo, FirstGroup,GallifordTry,Greene King, Mitie,
Stagecoach,Go-Ahead andWhitbread. These companies can be split into two groups: those that published their annual
reports before the result of the Brexit vote was known and those that published subsequently. Companies to report
before knowing the result include Whitbread, 3i, British Land, FirstGroup and Mitie with each making general reference
to the fact that the referendum has caused increased uncertainty and possible changes in the economic environment in
which they operate and that there could be unknown economic implications arising from the result without giving any
real detail.
The remaining companies, who published their annual reports subsequent to knowing the result of the referendum, also
overwhelmingly make reference to increased uncertainty as a result when discussing economic conditions as a principal
risk factor. Companies such as Go-Ahead,Close Brothers, Stagecoach, Diageo (Extract 4: Diageo Annual Report 2016 –
Page 20) and Barratt Developments (Extract 5: Barratt Developments Annual Report 2016 – Page 43) include reference
to the EU Brexit result specifically within a separate discussion of developments or changes during the year.
Stagecoach,GallifordTry andGreene King go further than just making general statements about uncertainty. Galliford
Try makes reference to the fact that the recent EU referendum has the potential to distort some of its markets and
Greene King states that in light of the referendum vote to leave the EU there is reduced consumer confidence in the
UK. Stagecoach states that the recent referendum in favour of the UK leaving the EU may lead to continuing economic,

18
consumer and political uncertainty. It adds that this in turn may affect asset values and foreign exchange rates, which
have a bearing on the amounts of its pension, financial instruments and other balances.
4.5.3 Brexit identified as a factor in regulation principal risk area
The seven companies that make reference to Brexit when discussing regulation as a principal risk factor are Sky, Fenner,
IGGroup, Babcock, NationalGrid, SSE and Hargreaves Lansdown. Of these companies, Babcock, NationalGrid and SSE,
published their annual reports before the result of the referendum was known with the remaining four companies
publishing subsequently. The two energy companies, NationalGrid and SSE, simply state that the potential impacts of
Brexit were taken into account when considering the regulatory environment as a principal risk factor without giving any
further detail.
Babcock gives further detail stating that if the UK votes to leave the EU the terms of British exit could have implications
on the requirements or regulations that are applicable to the business of the group including its licence to operate in
the EU. It expands on this by stating that its Mission Critical Services business, which is a provider of aviation emergency
services, as a European air operator must be majority owned and controlled by European Economic Area (EEA) nationals.
The company explains as part of its disclosure on mitigating actions that its articles of association empower it to protect
European air operating licences if necessary by controlling the level and/or limiting the rights of non-EEA owners of its
shares.
Financial services company IGGroup when describing regulatory risk includes reference to the UK EU referendum result
with what it terms ‘change risk’ being particularly relevant. It defines change risk as the risk that one of its regulators
introduces new regulation or the regulatory environment itself changes, impacting on the way it operates its business.
IGGroup (Extract 6: IG Group Annual Report 2016 – Page 52) expands on its description of change risk specifically in
respect of the EU referendum. It states that its business in continental Europe is offered pursuant to the EU passporting
regime for financial services. It states further that following the vote to leave the EU, any change in the UK’s membership
status could have an impact on how the group is able to operate. The company identifies the impact level of the risk as
high but in relation to status and mitigating actions it outlines that there is expected to be a period before any changes
are effective thus allowing for alternative options to be considered and implemented.
Fellow financial company Hargreaves Lansdown states that managing implementation of regulatory change has been
a major emerging risk area in recent years with the EU membership referendum identified as a key change considered by
the business.
Sky states that the telecommunications and media regulatory framework applying to it in the UK and the EU may be
subject to greater uncertainty in the event that the UK leaves the EU. It expands on this, stating further that potential
changes to the regulatory framework could include divergence in the long term between the UK and EU regulation of
telecommunications and media and changes to certain mutual recognition arrangements for media and broadcasting. It
explains, however, that at this time it does not foresee any regulatory changes as a result of a UK exit that would have
a material impact on its business. By way of mitigation, it states that it will monitor carefully future developments that
arise out of the result of the referendum and engage in any relevant regulatory processes.
When discussing regulatory requirements, Fenner simply states as part of a developments in the year section that as a
UK quoted company Brexit has created an element of uncertainty over the regulatory environment in which it operates.
4.5.4 Brexit identified as a factor in financial principal risk area
The nine companies in the sample that make reference to the Brexit referendum when discussing financial risks are
Renishaw Supergroup, Britvic, Aveva, Fenner, Sportsdirect, Brewin Dolphin, United Utilities and Victrex. United Utilities,
Brewin Dolphin and Fenner refer to multiple financial risks linked to Brexit. United Utilities, which published its annual
report prior to knowing the result, defines financial risk as the inability to appropriately finance the business due to
capital, credit market, funding, or tax related risk. It identifies Brexit as one of five current key risks, issues or areas of
uncertainty linked to overall financial risk.
Brewin Dolphin outlines in a separate ‘direction of change’ section that financial risk such as management and control of
finances and the effect of external factors (such as availability of credit, foreign exchange rates, interest rate movements

19
and other market exposures that could affect its cash flows, capital and liquidity) are slightly increased due to the
uncertainty caused by Brexit.
Fenner outlines that the recent weakening of sterling, especially since the Brexit vote, is being monitored. It is felt that
the weakening will have a positive impact on its reported earnings in sterling but an adverse effect on its net debt. It
explains further that as it refined its hedging strategy ahead of the Brexit vote it is expected that the recent currency
movements will not impact the degree to which it complies with financial covenants on its borrowing facilities.
The other six companies to link Brexit to financial risks refer to increased foreign exchange uncertainty. In respect of
foreign exchange, Aveva and Renishaw make reference to the level of risk in different time periods. Renishaw states
that recent positive movements are offset by future Brexit uncertainty. Aveva, which did not know the result of the
referendum when publishing its annual report, states that uncertainty due to the EU referendum is currently increasing
the foreign exchange risk that it faces and if the decision is to exit the increased uncertainty and volatility may prevail
into the medium term. Victrex under a heading of Mitigation in respect of foreign exchange risk gives the referendum as
an example of a major event, the impact of which may require modification of its hedging policy. SuperGroup outlines
that although it has a hedging policy in place, since the referendum the level of foreign exchange uncertainty that it faces
has increased. Britvic states that it reviewed the foreign exchange hedging it had in place ahead of the EU referendum to
ensure good levels of hedging were in place for its main currency pairs.
Sports Direct (Extract 7: Sport Direct Annual Report 2016 – Page 37) goes into detail explaining that it operates
internationally and that the majority of its foreign contracts relating to the sourcing and sale of branded goods are
denominated in US$ or € leaving it exposed to foreign exchange risk. It notes that following the outcome of the EU
referendum there is increased market volatility and in particular material changes to sterling/US$ and sterling/€
exchange rates and a lack of transparency as to those rates in the short to medium term. It notes further that these
factors are likely to impact purchases for which it is currently not hedged and therefore profitability for its 2017 financial
period and beyond.
4.5.5 Brexit identified as a factor in markets principal risk area
Three of the companies that refer to Brexit in relation to financial risks, Brewin Dolphin, Fenner and Victrex, also refer
to it in relation to uncertainty in the markets in which they operate as a separate risk factor. Other companies to make
reference to Brexit in relation to the markets in which they operate are QinetiQ, Kier and Babcock.
Victrex gives Brexit as an example of an event which could affect investment decisions by customers in its markets,
therefore impacting demand for its products. It does note, however, that Brexit has not had a material impact on its
performance in the current reporting period (ended 30 September 2016). Fenner states that in relation to key markets
risk it is monitoring the developments and possible impacts of the recent referendum vote to leave the EU. It notes,
however, that its trade flows between the UK and the rest of the EU are not currently substantial.
Kier makes reference to the EU referendum in both market and property market risk areas. In respect of the general
market area, it states that there have been a number of assessments of trading sensitivities during the year both before
and after the EU referendum and that it has undertaken contingency planning to consider and assess the associated
market risk linked to the result. Kier states that following the EU referendum, it has identified the potential for
a significant decline in the UK property market as a potential risk to its property and residential divisions. It states that
if the decline occurred, the financial performance of both divisions would likely be adversely affected. Again it notes
that it has undertaken contingency planning to consider and assess the associated market risk of the result of the EU
referendum.
QinetiQ, which did not know the result of the referendum when publishing its annual report, under a trading in a global
market risk area, states that the UK EU referendum may create uncertainty. Babcock, which also did not know the result
of the referendum when publishing its annual report, states under a customer profile risk area that if the vote was to be
to leave there would be uncertainty over the policies and procurement plans of both current and potential customers in
the UK and overseas. It notes that it relies heavily on retaining a relatively limited number of major customers. Brewin
Dolphin describes under a business and strategic risk area, within a separate section entitled direction of change, that
Brexit concerns have caused uncertainty in the market which may impact it in the future.

20
4.5.6 Brexit identified as a factor in resources principal risk areas
Four companies that make reference to Brexit in relation to resources used in their businesses are Electrocomponents,
Barratt Developments, Mitchells Butlers and Debenhams.
Electrocomponents under a heading of ‘strategic risks’ discloses that consequences of a UK exit from the EU include a risk
to its supply chain activities across the UK and EU including possible changes to customs duties and tariffs. The company
states that in order to mitigate this risk it has carried out a review of business areas which would be affected by a UK
exit including worldwide trading agreements, its global supply chain infrastructure including the transport of products
between the UK and EU and group purchasing arrangements both within and outside the EU.
Mitchells Butlers also draws attention to Brexit being a factor in the cost of goods as part of its principal risk
disclosures. It notes that the risk in respect of the cost of goods is increasing due to the devaluation of sterling following
the Brexit vote.
Barratt Developments (Extract 5: Barratt Developments Annual Report 2016 Page – 43) goes into more detail when
discussing risks that may exist in relation to the availability of raw materials, sub-contractors and suppliers as a result
of Brexit. It explains that whilst the majority of its raw materials are sourced from UK suppliers, some such as timber are
sourced from outside the UK and in addition some components contain materials from outside the UK. It notes that the
decrease in the value of Sterling following the EU referendum may, subject to other factors such as demand, lead to an
increase in the cost of these materials and components. Barratt Developments also states that a significant proportion of
the skilled sub-contractors upon its sites are nationals of other EU countries. It notes, however, that it is too early to say
what impact the vote to leave the EU will have on the availability of sub-contractors.
Debenhams notes that the decision to exit the EU could impact on the availability of talent in the job market and the
eligibility of individuals to work in certain jurisdictions. It notes that the key personnel risk is not new but it now reports
it as a principal risk factor following an annual review of its ranking.
4.5.7 Brexit identified as a factor in other principal risk areas
British Land, which published its annual report prior to knowing the result of the referendum, draws attention to Brexit
in relation to the political outlook as a principal risk. It states that the referendum as a significant political event brings
risk both in terms of uncertainty until the outcome is known and the impact on policies introduced and in the areas of
the reluctance of investors and businesses to make investment decisions whilst the outcome remains uncertain and on
determination of the outcome, the impact on the case for investment in the UK and on specific policies and regulation
introduced, particularly those which directly impact real estate. It notes that while uncertainty remains as to the
outcome of the referendum, it maintains support for remaining in the EU.
Diageo also makes reference to the political situation linked to the Brexit vote as a part of its principal risk disclosures. It
notes that it will be likely to result in a sustained period of economic and political uncertainty. A third company to make
reference to Brexit in relation to the political situation is Go-Ahead which states that following the EU referendum and
changes in government, uncertainty around the outlook for government policy has increased.
Genus draws attention to Brexit in relation to the funding of pensions as a principal risk area. In a specific change section,
it states that the pension trustees’ decision to grant future pension increases on the basis of the movement in CPI
rather than RPI is currently being partially offset by the impact of falling bond yields following the EU referendum in the
UK. Close Brothers notes in a specific change section that heighted uncertainty for the UK economy following the EU
referendum has increased the potential risk of higher credit losses.
4.5.8 The disclosure of current impacts of Brexit
Financial instruments, foreign exchange and hedging
Nine companies that highlight the current impact of Brexit linked to foreign exchange movements are: Renishaw,Go-
Ahead, Sports Direct,Victrex, Diploma, Fenner, Marston’s,Wolseley and Genus. Of these companies, Renishaw, Diploma,
Wolseley and Genus make reference to translation gains in relation to the translation of foreign operations following the
weakening of sterling as a result of the Brexit vote. Victrex also makes reference to a favourable currency impact, noting

21
that although it hedges currency up to 12 months in advance, this year it has seen translational gains on its international
sales after the considerable weakening of sterling following the Brexit vote.
Two other companies to make reference to hedging linked to the negative impact on sterling following the Brexit vote
are Fenner and Sports Direct. Fenner states that it reviewed its hedging strategy in respect of US$ denominated debt
to mitigate the foreign exchange movements following the Brexit vote. Sports Direct in contrast states, within a post
balance sheet events note to its financial statements, that the negative impact on sterling to US$ exchange rates
following the Brexit vote is likely to impact US$ purchases for which it is not currently hedged for the 2017 financial
period and beyond. It states further that it does not consider this an adjusting event for the accounting period ended
24 April 2016. The auditors of Sports Direct (Extract 8: Sports Direct Annual Report 2016 Page 66) draw attention to
its hedging strategy and its accounting for foreign currency forward contracts as an area of possible risk of material
misstatement. They state that considering the long-term nature of the instruments they could have a material impact
on its future results especially given the results of the recent EU referendum.
The information disclosed by Go-Ahead and Marston’s is somewhat more intangible. Go-Ahead states that a weak pound
following Brexit will put upward pressure on the cost of fuel which has historically led to a shift from private cars to
public transport. Marston’s states that the post-Brexit drop in the value of sterling may boost overseas visitor numbers,
whilst increasing demand for stay at home leisure visits.
Dunelm, within the report by its chief financial officer, links the Brexit vote to additional disclosures in respect of hedging
and financial instruments in a note to its financial statements. It explains that following the Brexit vote its hedging
balance was material at its year end. It now outlines within a note to the accounts its objectives, policies, and processes
for managing capital, its financial risk objectives, details of its financial instruments and hedging activities and its
exposures to credit and liquidity risk.
Post balance sheet events and funding
In the case of IGGroup and Ryanair Brexit is mentioned in its post balance sheet events note. IGGroup states that it
withdrew and fully repaid £160m which was drawn in different tranches in anticipation of extreme market volatility
linked to the result of the Brexit referendum.
Ryanair also makes reference to funds. It states that following the vote to leave the EU it increased the size of a share
buy-back program to the 5% buy-back limit previously approved by shareholders. It explains that between 1 April 2016
and 1 July 2016 it bought back 36m shares at a total cost of approximately €467.5m, with all such shares being
cancelled. It further outlines that an EGM was to be held to seek approval from shareholders to grant the board the
discretion to engage in further share buy-backs should they decide it is in the best interest of the shareholders over the
next 15 months. It outlines further that the board is seeking the flexibility and discretion to buy back shares if there is
further market volatility such as witnessed in the aftermath of the UK referendum vote.
Impairment and valuations
Barratt Developments and Daejan mention Brexit in the inventories and accounting policies notes respectively. In both
cases, the disclosures are in respect of significant judgments, key assumptions and estimates. Barratt Developments
states that in relation to key judgments in respect of inventory impairments during the year it has benefited from
favourable market conditions but increased uncertainty due to Brexit. It explains that if the UK housing market were
to change beyond management expectations in the future, in particular with regards to assumptions around sales
prices and estimated costs to complete, further adjustments to the carrying value of land and work in progress may be
required. The auditors of Barratt Developments (Extract 9: Barratt Developments Annual Report 2016 Page 107) highlight
this as an area of risk of material misstatement noting that the outcome of the EU referendum has resulted in greater
political and economic uncertainty which may impact selling prices, sales rates and build costs especially in the longer
term.
Daejan states that property valuations are subject to a degree of uncertainty and are made on the basis of assumptions
which may not prove to be accurate, particularly in periods of difficult market or economic conditions such as those that
may arise following the EU referendum.

22
Pensions and remuneration
A further company, GallifordTry links Brexit to valuation but only within the financial review and not in the ‘back half’
financials. The financial review notes that the movement from its pension scheme from a £1.2m surplus at the end of the
previous year to a £4.3m deficit this year was driven by lower market discount rates exacerbated in the days immediately
following the EU referendum.
Five companies that make reference to Brexit in their directors’ remuneration reports are Barratt Developments, Mitchells
Butlers, Fenner,GallifordTry and Hays. Each of these companies either disclose that they have deferred setting or
changed performance targets linked to directors remuneration as a result of Brexit. Mitchells Butlers states that it
changes this year the reference date on which it takes the share price to determine the number of options to be awarded
under its long-term incentive plan. It states that normally the number of options is based on the share price on the day
prior to the award being made. This year, however, as the date was soon after the Brexit referendum and there had been
a related fall in share price, it has instead decided to use the share price in the middle of June before the referendum had
been held. Fenner also discloses a change in variable reward conditions stating that based on the significant devaluation
of sterling following the Brexit vote, earnings per share (EPS) targets are set at constant exchange rates to avoid
a windfall element arising from currency changes.
The other three companies, Barratt Developments,GallifordTry and Hays all refer to Brexit uncertainty having an
impact on the setting of remuneration targets and that targets will be disclosed in the 2017 annual report. Barratt
Developments states that it will defer setting targets linked to its annual bonus plan and long-term performance plan
until October 2016 when it is hoped there will be more clarity. GallifordTry states that at this time, it does not feel that
it has sufficient clarity on the impact of the EU referendum to set three year targets linked to its long-term incentive
plan so has deferred this to closer to the grant date. Hays states that it decided to widen the range around EPS targets
linked to annual bonus payments for its 2017 financial year to reflect increased uncertainty in relation to earnings and to
ensure that any maximum bonus target would require a level of profit achievement materially above the then consensus
external forecast and that achieved in its 2016 financial year. When discussing total shareholder return performance in
the current year within its remuneration report, Hays states that following the UK referendum to leave the EU, its share
price fell from 136.9p on 23 June to 97.65p on 30 June.
4.6 Conclusion
Brexit is undoubtedly leading to uncertainty and increased risk for companies with there being numerous references
to such within the strategic report sections of annual reports. There are also a number of companies to make reference
to it already having an impact on their bottom line and current year results. The uncertainty linked to Brexit is likely to
persist for years to come, so it remains to be seen what further disclosure and profit recognition impacts we are likely
to see in annual reports. As far as companies are concerned, Brexit is a developing area which will have to be kept under
review so as to ensure they are in the best position to adapt to the risks and uncertainties and possibly take advantage
of any opportunities that lie ahead. The bottom line is that companies, like the rest of us, are playing a waiting game to
see what the eventual impact of Brexit will be.
5 Audit – thresholds may shift post-Brexit
Matthew Stallabrass ACA, audit partner, corporate team at Crowe Clark Whitehill reviews the potential changes to
the audit and regulatory environment in a post-Brexit world for CCH Daily.
As powers are returned from Brussels to the UK, Brexit may present a significant impact for audit, including both the
audit thresholds and the regulation of audit firms.
Audit thresholds have been steadily rising in recent years with the most recent change increasing the turnover threshold
to £10.2m for years commencing on or after 1 January 2016. Ultimately, the audit threshold is linked to the small
company limits, which are currently set by the EU. Member states have the power to impose a lower threshold than the
small company limits, but not a higher one.
By aligning the audit threshold limit with the small companies’ threshold, the UK has one of the highest audit exemption
limits in Europe. This has been a consistent position of the UK government and it is hard to see Brexit resulting in
a lowering of the audit limits.

23
Post-Brexit, this cap on the audit threshold will be removed and the UK can reconsider the value of audit to the economy
as a whole and determine what the appropriate limit is.
For the first time, the radical option of removing the requirement for a statutory audit at all for private companies will be
available.
This option will have many opponents, especially among the profession, but it should be taken seriously as, after all,
the US economy and the accountancy profession both function well without a statutory audit requirement for smaller
companies.
Proponents of this argument will point out that creditors are able to protect themselves by requiring an audit if that is
seen to add value and assurance, and therefore do not need a statutory requirement. Whether this option is taken up will
no doubt depend on the political mood but it is not inconceivable that a post-Brexit Conservative government will be
keen to cut red tape and reduce the cost of doing business in the UK.
5.1 Audit regulation
The Audit Regulation and Directive (ARD), recently brought into UK law, identifies the Financial Reporting Council
(FRC) as the Single Competent Authority giving direct regulatory oversight over all public interest entity (PIE) auditors
in the UK. This designation took regulatory powers away from the Recognised Supervisory Bodies, including the ICAEW,
ICAS and ACCA.
Brexit allows for the position to be reviewed again and here there are two possible areas for debate. First and foremost,
the need to have a body designated as a Single Competent Authority. Many will question whether there was any flaw in
the pre-ARD system of regulation and whether the cost of change, as borne though the increasing levy raised by the FRC,
is justified.
Many smaller accounting firms, drawn into the scope of FRC regulation for the first time due to auditing only a small
number of PIEs, will also question whether the additional costs are merited.
In examining this issue, consideration will be given to the effect of regulatory change on the audit market. In particular,
this should question whether there is evidence of a reduced choice for PIEs in appointing their auditors as audit firms
increasingly decline to tender for fear of being brought into the scope of FRC regulation.
Without the European oversight, the definition of a PIE may be scrutinised and fall into the post-Brexit debate. Quite
correctly, the FRC chose not to extend the definition of a PIE beyond that given in the ARD – but is this definition
appropriate for UK circumstances?
Two areas will no doubt be questioned. First, given the size of the UK’s capital markets, is it reasonable to deem all firms
on the main market of the London Stock Exchange as being PIEs regardless of their market capitalisation? Personally, I
would argue to the contrary and would suggest a market capitalisation threshold is introduced: the level can be debated
but a three-year average of £1bn would be workable.
In debating the definition of a PIE, the possibility of broadening the scope should also be considered. Normally, I would
argue against such an extension, but it is salient to reflect on the recent administration of BHS. It is clear from the
reaction of the various parliamentary committees investigating the collapse that the wider public considered a business
that employed in excess of 11,000 people to be a PIE. The accounting profession should consider this and respond
accordingly.
There is much in auditing and accounting regulation that derives from EU law, from the regulatory scope of the FRC to
the audit thresholds themselves. Embedded in other regulations are also definitions that ultimately come from Europe,
such as the smaller quoted company exemptions in the FRC’s Ethical Standards for auditors that derive from Markets in
Financial Instruments Directive II (MIFID II).
Brexit presents an opportunity for these areas to be debated and alternatives to be explored. The profession and the
regulators should engage positively with this debate and be prepared to think radically. Even if the conclusion is that no
change should be made, the debate will be a positive one and will show a profession, and a regulator, prepared to engage
with fundamental questions.

24
5.2 Auditing and ethical standards
The Ethical Standards have only recently been revised as the Audit Regulation and Directive (ARD) was transcribed
into UK law and standards, which came into force in June of this year. Brexit allows a chance for these standards to be
revisited as the UK will no longer have to abide by the ARD.
Whilst I suspect the FRC, and the profession in general, will not wish to see another significant revision, Brexit may
in fact provide the FRC an opportune excuse to issue further guidance on the Ethical Standards or to clarify areas of
uncertainty. Without the need to align to other countries such clarification and guidance would be more aligned to UK
circumstances.
Meanwhile, as international standards on auditing are globally recognised, Brexit will not change their use in the UK.
6 Potential tax and VAT changes
6.1 What could happen to the tax and VAT system?
Written in October 2016 as the Government began the process of forming its roadmap to Brexit, RSM senior tax
partner George Bull looks at what form the tax system will take on post-Brexit for CCH Daily.
Brexit represents a conundrum for tax policy-makers. On the one hand, leaving Europe provides the opportunity to
abandon EU restrictions on the UK tax system, allowing it to evolve to meet our own needs. On the other hand, with
thousands of regulations to rewrite, complex negotiations to be undertaken and all of this in the context of global
economic uncertainty where the UK wishes to continue to play a vital role, there is a serious risk that the opportunity to
clean up the UK tax system will be missed because of lack of resources and too much busy-ness in other areas.
I had the opportunity to participate in a fringe event at the Conservative Party conference where we debated this. Here
are some of the key points which emerged.
6.1.1 The UK tax system is too complex
Notwithstanding all the good work done by the Office of Tax Simplification, Parliament enacts hundreds of pages of new
tax laws every year. Does the UK need so many tax reliefs? Would fewer reliefs, and the policing of those reliefs, produce
a shorter tax code and lower tax rates? The UK needs a simpler system which is driven by evidence-based policies and is
underpinned by a desire to have an integrated, stable and sensible whole.
6.1.2 People are losing faith in the UK tax system
Perceptions that some companies and individuals can use tax rules to avoid tax unfairly, coupled with the never-
ending changes in tax law, mean that people are losing faith in the tax system. By creating a simpler, stable, open and
demonstrably fairer tax system, the Government has the opportunity to restore trust.
6.1.3 What do we want the UK tax system to do?
Next, we should ask what we want from the UK tax system. That’s not only about how much tax we need to raise,
but also about who should pay how much tax, and on what. It’s also about the social goods which we want to achieve
through the tax system by using tax reliefs and incentives. What sort of country do we want to be? Fairness and social
justice are crucial.
6.1.4 What about business taxes?
In the case of business taxes, we have to address three questions which reflect our status as a major global
economic power: First, should we continue to use the tax system to boost our international competitiveness through
low corporate tax rates and other measures? Should corporation tax even be abolished?
Whatever is decided, it is essential that the UK remains involved in the OECD’s Base Erosion and Profit Shifting
(BEPS) project so that we can continue to work on stamping out aggressive tax avoidance while ensuring that the tax
system doesn’t create artificial barriers to growth; and the existing, complex business tax regime impacts large and small
companies alike. Now is the time to create a simpler tax code for smaller businesses.

25
6.1.5 Integrate income tax and National Insurance
Integration offers the prospect of a massive simplification in the UK tax system. If we integrate income tax and National
Insurance contributions, we also have the opportunity to consider how we tax things like self-employed income,
employment income, pensions, property income, interest, dividends, short-term capital gains and long-term capital
gains.
It was suggested that inheritance tax should be abolished, to be replaced with a capital gains tax charge on the growth in
asset values at the time of a person’s death.
6.1.6 Changing EU-driven tax rules
The requirements:
• to treat EU-resident individuals and companies in the same way that we treat UK-resident individuals and
companies; and
• comply with State Aid rules which have reined in some UK tax laws intended to boost the UK economy which have
had wide-ranging effects.
These include transfer-pricing, the enterprise investment scheme, venture capital trusts and ‘patent box’. The names
alone indicate how important these measures are to the UK as it builds a vibrant, knowledge-based innovative economy.
The potential lifting of the State Aid and other restrictions provides an opportunity to restore these tax rules to the way
the UK wanted them to be in the first place, and to develop more precisely focused regional tax policies within the UK.
6.1.7 The role of VAT
VAT is a European tax and there is every reason to believe that it will continue in a UK form after Brexit. It is also the
single tax most likely to influence consumer spending and therefore the economic prospects of the UK. During the
debate, the Government was urged to consider cutting the VAT rate to stimulate demand – demand which is more likely
to be met from domestic production while a weak pound is increasing the cost of imports. In due course, the VAT rate
could be restored to its present level.
So we have a magnificent opportunity to create a post-Brexit tax system which meets our future needs as a nation, and
is much better at meeting those needs than the current system is now. But time is tight and resources are limited. Can
Parliament rise to the challenge?
6.2 What are the views of firms?
Following the vote to leave the EU, accountancy firms and professional bodies moved swiftly to emphasise the need to
plan for a period of upheaval and, in particular, potential tax changes. Pat Sweet for CCH Daily gathered some interesting
views shortly after the Brexit vote in June 2016 which are still worth considering in this ongoing environment of debate
and uncertainty.
KPMG chairman Simon Collins described the result as ushering in a new era for business, saying:
‘Companies are concerned and need time to assess the implications. But businesses are resilient and will adapt to any
new landscape.’
David Sproul, chief executive of Deloitte UK, said:
‘While the UK has opted for a future outside the EU, Britain remains a competitive, innovative and highly-skilled
economy and an attractive place for business. However, as indicated by today’s market volatility we are likely to see a
period of uncertainty.
Businesses need to ensure they are set up to navigate the immediate risks and impacts of an exit, and have the
processes and people in place to manage a period of upheaval. Against this backdrop of uncertainty, British businesses
must continue to be proactive in finding ways to raise productivity and drive growth.’
This view was echoed by Robert Hannah, chief operating officer at Grant Thornton UK, who said there was now likely to
be a period of ‘instability and uncertainty’.

26
Hannah further said:
‘It is important to bear in mind that very little changes immediately, so businesses should stay calm, review their
contingency plans and start considering the mid-long term opportunities while the dust settles. Organisations need to
assess the risks to their business and develop strategies which mitigate these, or indeed, capitalise on new opportunities.’
Carolyn Fairbairn, CBI director-general, said:
‘Many businesses will be concerned and need time to assess the implications. But they are used to dealing with
challenge and change and we should be confident they will adapt.
The urgent priority now is to reassure the markets. We need strong and calm leadership from the government,
working with the Bank of England, to shore up confidence and stability in the economy.’
Kevin Nicholson, head of tax at PwC, said that Brexit will undoubtedly affect how people and businesses are taxed, and
in the short term predicted that uncertainty on future tax rules will create challenges for businesses as they plan ahead.
Nicholson said:
‘The UK will now have more scope to use tax to help particular industries, regions, and groups of people. Great care
will be needed to prevent unintended consequences as legislation from Brussels is removed. Longer term, there will be
fewer layers of legislation, which should simplify the tax system for businesses large and small.’
Nicholson pointed out that from the date of exit, the UK will have much greater freedom to set its own VAT rules, which
could see more items being zero rated, or could be used as a way of increasing tax revenues. He also said the future
shape of corporate tax in the UK will change, although it is not possible to predict exactly how.
Nicholson also said:
‘EU directives and EU case law will not be relevant to UK corporation tax. This may reduce the amount of legislation
but, as this includes legislation which act as relieving provisions, in some cases business will end up paying more tax.
For example, the zero rate of dividend withholding tax under the parent-subsidiary directive will not apply and UK parent
companies will need to fall back on treaty rates of withholding – which in the case of Germany and Italy are higher.
The UK government will also no longer need to ensure that corporation tax legislation permits freedom of
establishment in other EU member states. Depending on the exit negotiations, it may feel freer to implement
measures to attract foreign investment as part of the “Britain open for business” initiative.’
In its analysis of developments post-Brexit, ICAS said there will issues raised in other areas of government policy,
including anti-money laundering, data protection, competition, harmonisation of product standards, consumer rights,
and pensions.
ICAS said in a statement:
‘In areas of accountancy, what new policies will follow? Will it be inclined or persuaded to depart from International
Financial Reporting Standards (IFRS) and re-establish UK generally accepted accounting practice (UK GAAP)? Will the
EU audit directive and regulations continue to be implemented as planned, or will some aspects be reversed?’
7 Brexit: EU nationals working in the UK
One of the key messages of the successful ‘Leave’ campaign before the June 2016 referendum was that withdrawal
from the European Union (EU) was the best chance for the United Kingdom (UK) ‘to regain control’ over
immigration, particularly that from the poorer countries of Eastern Europe, which would consequently relieve
pressure on public services.
The expectation of those who voted for Brexit must surely be that leaving the EU will reduce dramatically the
flow of immigration from Europe. How realistic is this expectation? What will Brexit mean for employers who are
currently heavily reliant on the EU for their workforce? Will the citizens of other EU member states continue to
enjoy an automatic right to travel to and work in the UK? And what is the situation for those British employees
working in the EU?
Stuart Chamberlain, Wolters Kluwer Author and Employment Law specialist, examines these issues.

Accountants digest - april 2017

Accountants digest - april 2017

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