Users of accounts are currently well served by EU-endorsed international financial reporting standards, says Jane Fuller, but what happens in a post-Brexit world?
This article was first published in the April 2018 UK edition of Accounting and Business magazine.
UK-based users of accounts are an internationally minded bunch. They invest across borders, comparing companies on a sectoral basis. Even if they stick to the FTSE 100 index of UK-listed companies, these tend to be multinational.
Inevitably, there is nervousness over what financial reporting standards will apply post-Brexit – at present, UK-listed companies follow IFRS as adopted by the EU. The Department for Business, Energy & Industrial Strategy is conducting an informal consultation on the future arrangement.
Many users of accounts are well served by IFRS Standards, which facilitate cross-border comparisons of companies. The UK, as a capital markets hub, has an interest in making it easy for companies from wherever to list their securities and raise funds. Standardised financial reporting oils these wheels.
The ideal position is for the UK to adopt IFRS unadulterated. Assuming the ‘take back control’ political mantra rules out direct standard-setting by a supra-national body, how best to achieve the same end via UK institutions? As it happens, the Financial Reporting Council (FRC) has delegated powers under the Companies Act 2006 to set UK standards for private companies.
The simplest solution would be for the FRC to endorse IFRS for publicly accountable companies, which would be achieved by the government extending the FRC’s powers to be the body prescribed to endorse new and amended IFRS. This would not preclude the UK adding some disclosure requirements, if enough investors demanded it, although the bar should be high for any gold-plating.
What are the risks to this approach? One is that the resurrection of national power over standard-setting will invite political or corporate lobbying for deviations from IFRS. The insurance industry is flexing this muscle over IFRS 17. It has seen continental parties attract the International Accounting Standards Board’s (IASB) attention by threatening not to endorse it; a separate UK process could equip it with the same lever.
It is worth remembering that the UK already has influence over IFRS. Its long tradition of accounting expertise means it is well placed to have a British presence on the IASB – as part of the wider European (not EU) cohort, to have a strong voice in the International Forum of Accounting Standard Setters – and to collaborate with the IASB in research and technical developments.
An argument sadly overlooked in the Brexit debate is the extent to which the UK influences standards applied on every continent for financial reporting, auditing and bank capital requirements. The EU is a ‘taker’ of these standards.
I suspect the real source of sensitivity is that if the UK does not mimic the EU in requiring parliamentary endorsement, it will become a ‘non-equivalence’ stick to beat the country with. But it is not worth sacrificing the most logical solution to political forces that are impossible to predict or control.
Jane Fuller is a fellow of CFA UK and serves on the Audit and Assurance Council of the Financial Reporting Council
"The resurrection of national power over standard-setting would encourage political or corporate lobbying for deviations from IFRS"