In my most recent blog on Brexit I referred to the likelihood of the UK continuing to use IFRS after its departure from the EU. Does this mean UK listed companies just carry on applying existing IFRSs and follow any new standards issued by the IASB? I’m afraid not it's not that simple!
Currently, the EU chooses whether to adopt or reject IFRS on a standard-by-standard basis in a legal ‘endorsement’ process. Whilst not common in practice, the EU can also choose to take out certain provisions from the standards or select alternative effective dates. The current endorsement process is unlikely to apply in the UK after Brexit, or at least after the end of an agreed transitional period, and it will be necessary to consider how the UK should in future deal with new and amended IASB standards.
The UK has a wide range of policy options to choose from. ICAEW’s recently published report, Brexit: Implications for financial reporting, considers three key options available and explores some of their pros and cons:
So far the arguments for introducing an UK endorsement mechanism and endorsement criteria seem, on balance, to have been persuasive. A new national mechanism could function more smoothly and far more quickly than its EU big sister. Indeed, this outcome could be regarded as a key prize available to the UK from the change in endorsement arrangements. Whilst the time and resources involved in establishing and operating a national endorsement mechanism are likely to be significant, the report discusses how these can be kept to a minimum.
The UK will then need to set out endorsement criteria for any IFRS to meet before it is adopted. While current EU endorsement criteria can be used as a starting point, the opportunity should be taken to consider how they could be improved and simplified, in ways that do not detract from a clear focus on the need of investors for transparent financial information.
The endorsement decision is a complex issue and requires proper debate by UK stakeholders. Any decision about the UK’s approach to IFRS adoption will have significant implications for the future of UK reporting and even for the future success of IFRS internationally. The importance of the issues involved should not be dismissed lightly. I'm hoping the UK government will consult publicly about the issues before too long.
To find out more about the possible features of a UK endorsement mechanism you can access the full ICAEW report below, together with the recording of a debate I chaired in late 2017 amongst a panel of experts on the financial reporting implications of Brexit.