What does Brexit mean for IFRS?

By David Wood and Amy Hutchinson, ICAS Policy Leadership Division

24 January 2017

ICAS believes that, post Brexit, it is in the interests of the UK’s economy and businesses to continue to adopt International Financial Reporting Standards (IFRS).

Why is this important?

All listed companies in the EU are required to prepare their group financial statements under EU-adopted IFRS.  More widely, the use of IFRS for public companies is now required in 120 jurisdictions worldwide. It is widely recognised as the global standard for financial reporting, and a number of studies have highlighted the benefits of using a single set of financial reporting standards.

Investors and regulators value the consistency and comparability of financial statements prepared under IFRS.  The continued use of IFRS in the UK is, therefore, helpful to UK companies seeking foreign investment and to maintain the attractiveness of the UK as a place to do business.

The UK has traditionally been at the forefront of developments in financial and corporate reporting.  A move away from IFRS could be viewed as a retrograde step which could negatively impact the competitiveness of UK business and markets.

The alternatives

ICAS believes there is no viable alternative to IFRS for the UK’s largest companies, at present.

Current UK Generally Accepted Accounting Principles (GAAP) is largely IFRS-based, but simplified so that it is relevant to private companies.  Adapting UK GAAP to the needs of listed companies would be time-consuming and ultimately would not result in significant differences from IFRS.  It would be costly to undertake, but would also negate the positives outlined above of international acceptance of IFRS.

The issues

The UK is currently bound by the 2002 EU IAS Regulation which established a process for the endorsement of IFRS standards for use in the EU.  Endorsement is a lengthy and detailed process, but virtually all standards are endorsed as issued by the International Accounting Standards Board (IASB).  With the EU being one of the major users of IFRS, the existence of this endorsement mechanism might seem to guarantee the EU a considerable degree of influence in the setting of standards.

Post Brexit, the UK government will need to address two key issues:  the legal mechanism for adopting IFRS for use in the UK, and the wider issue of maintaining the UK’s influence on international standard-setting.  ICAS supports a brief endorsement process based on the principle of minimum deviation, overseen by the Financial Reporting Council (FRC).  In addition, continuing to engage with the IASB at an early stage in the development of new and revised standards is the best way for the UK to continue to influence the development of high-quality global reporting standards.

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