Rethinking Financial Reporting in the UK amid Regulatory Changes

Finance and accounting key areas are mostly hinged on regulatory framework updates, albeit they currently undergo changes during our gradual recovery from the pandemic. 

In this blog, we discuss how compliance with these laws affects financial reporting in the UK, notably as we encounter a global health crisis and a substantial transition that is Brexit.

In hindsight: FY 2021 

The immense disruptions of the previous years catapulted the financial arena into a swarm of uncertainties. Both post-Brexit and COVID-19 talks are going down the wire to address any medium or long-term implications these phenomena may throw.

Overcoming these unprecedented challenges, businesses deployed proactive measures to make sure they stand firm, or that they get back on their feet in no time. There were efforts in supporting business liquidity, adopting digitalisation, restructuring organisational models, and other similar courses of action which yielded positive effects in strengthening their resiliency, agility, and innovativeness. The growth trajectory is slowly building as we move further along with recovery.

The financial reports for the year uncover how businesses mitigated the risks surrounding their operations, and how they fared being in dire straits for a year and counting.  

Corporate financial reporting issues and problems 

The pandemic inflicted drastic impacts on the preparation of financial statements. With such changes come a sweep of challenges that reshape the F&A arena for what’s coming.

1. Financial reporting disclosures 

   Regardless of how the current circumstances have affected your records, your financial reporting should be able to reflect them comprehensively. Clients and stakeholders must understand the financial statement adequately, including the minimal and significant implications of the pandemic on the financial results. This effect varies from company to company, making it hard to gauge all estimations and liabilities for the record. 

   With that in mind, organisations are endeavouring to ensure these uncertainties are disclosed in the financial reports. The estimates, judgments, and full, company-specific disclosures become the focus areas as they prepare the annual document. 

2. Regulatory challenges

   There are several regulatory changes in the financial services industry come 2021, such as the post-Brexit deployment of the International Financial Reporting Standards as introduced by the UK.

   Compared to the pandemic, the UK’s divorce from the EU did not draw much attention to the financial reporting requirements as much as the former did. The Financial Reporting Council (FCR) announced that they are going to channel their efforts to the disclosures regarding the uncertainties of the UK’s exit from the EU. Companies need to evaluate the risks in credit, liquidity, currency, as a part of this initiative as well.

   Additional considerations such as switching from the EU-adopted IFRS to the UK-adopted International Accounting Standards (IAS) were made effective starting 1 January 2021. 

   Read: Post-Brexit Impact on UK’s Financial Reporting

   According to the report of ICAEW, financial statement measurements and forward-looking assessments need to consider the following matters for a more accurate report.

   • Measurement of non-financial assets
   • Financial instruments
   • Inventories
   • Deferred tax assets
   • Foreign exchange
   • Onerous contracts
     
     

3. Environmental, Social, and Governance risks

   ESG is governed by multiple standards that are created by international forums, policymakers and other concerned bodies. Since they are voluntary—but will be mandatory in the UK starting 2025— key executives in the financial industry are finding it hard to examine ESG risks fairly, hence, the call for the establishment of a standardised framework and their full participation in worldwide efforts to ratify a uniform ESG metrics. The exploration of its affiliated risks is still in its infancy that’s why there is still no definite way to monitor and report them. 

   Financial services regulators have the power to set expectations in their respective jurisdictions to cater to financial climate-related risks and ESG risks in a broader sense. 

   A Financial Accounting Standards Board (FASB) study reveals that depending on the accounting standard a business follows, ESG can be felt in their different facets. Some ESG matters may have a direct impact on disclosed amounts in the financial statements, some may have an indirect effect, and there can also be an unfavourable, favourable, or neutral impact on financial statements. 

   You can read more about the connection of ESG policy to the financial statements of businesses here. 

Importance of regulatory framework in accounting 

Regulatory laws differ from one discipline to another. It mandates how concerned bodies and organisations operate especially when dealing with sensitive information of clients and monetary affairs. Strong adherence to government law is a requisite so issues such as data protection, cybersecurity, and money laundering can be prevented.

So how does regulatory compliance affect your financial reporting?

With a uniform practice in accounting, companies are guaranteed that they are on track with the legal side of operations. A consistent standard makes it easier to consolidate financial records, especially if you have different subsidiaries. Adhering to an internationally accepted standard protects executives from misinformation, and protects your reputation from possible license revocations, penalties and lawsuits due to non-compliance.  

Like in any other country, complying with the financial reporting in the UK can get your company in quite a muddle, particularly because it correlates to an ever-changing aspect of the business— the regulatory laws. Make sure to keep an eye out for the latest developments in the post-Brexit situation and the government pandemic response and how it will affect your operations.

Looking for a dependable team to handle your compliance and regulatory affairs? We’re here to help. D&V Philippines has over 500 accountants who are abreast with the latest UK rulings and upskilled to meet your F&A requirements. 

You can grab your copy of our whitepaper Premium Solutions for UK Accounting Firms to learn how we can better serve your F&A needs, or contact us today to know more.