Thinking about Brexit when business-owners prepare their accounts

Thought about Brexit when preparing for your accounts?

Thinking about Brexit when business-owners prepare their accounts

It feels like Brexit has dominated our lives for the last 30 or so months.

Some businesses may benefit commercially from the UK’s exit from the European Union. However, the lack of clear direction has created such uncertainty that many business-owners are unsure how Brexit will affect their companies. As directors prepare their financial statements in the coming months and beyond, they need to be considering what impacts Brexit might have on their businesses, particularly in relation to their assessment of going concern.

Some may ask: why is a going concern assessment important, and do directors really need to undertake one? If a company goes into insolvent liquidation or administration, a director can be personally liable for wrongful trading. This in itself makes the case compelling.

Firstly, under UK accounting standards, directors have a mandatory requirement to make an assessment of going concern. Secondly, under the Companies Act, directors have a duty to promote the success of their companies for the benefit of their shareholders, and that includes proper financial management of the business. Therefore, apart from being good practice to review the trading outlook and cashflow requirements of the business, going concern assessments are enshrined in accounting standards and company law, so must not be ignored.

What is not always clear is the form this assessment should take. What should be considered? And what if there are indications that going concern is not appropriate, particularly in light of Brexit?

Definition of going concern

Firstly, what is meant by “going concern”? A company is a going concern unless the directors either intend to liquidate the company or to cease trading, or have no realistic alternative but to do so.

It is important to note that where accounts are prepared on a going concern basis, this does not imply an absolute level of confidence that the company will be able to continue as a going concern. Even when a company is in severe financial difficulties, UK accounting standards require the going concern basis to be used unless there is an intention to liquidate, or no realistic alternative to ceasing trade.

When there is significant uncertainty over whether a company can continue in operational existence, the going concern basis should continue to be used and appropriate disclosures made.

General principles for assessing going concern

The extent of the directors’ assessment process will depend upon the size, complexity and the particular circumstances of the company. The assessment could be a simple discussion, though best practice is to formally document the consideration and have it approved by the board.

Companies that require an audit may find there is closer scrutiny over their going concern assessment, following changes in the auditor’s report requiring a specific conclusion on use of the going concern basis. Auditors will expect a more formal assessment to be prepared where there are known or suspected going concern issues, and, undoubtedly, even greater emphasis will be placed on the assessment, with Brexit on the horizon.

The period of assessment should cover at least twelve months from the date on which the accounts are authorised.

Brexit-specific issues to consider

The following factors may impact on businesses, and so they should be considered when directors make their going concern assessments:

  • Increased costs relating to imported EU goods (including direct costs, such as higher tariffs and duties, but also indirect costs, such as those arising from delays at UK and EU ports);
  • Rises in tariffs and duties on goods exported to the EU (including the risk of double duty or paying duty on selling – rather than cost – prices);
  • The impact of the above on fulfilling sales orders;
  • Restricted market access where a business has relied on “passporting” rights under EU law (e.g. hauliers);
  • Reduced access to the EU for business purposes and the requirement for work permits for UK nationals who are not working there on a short-term basis;
  • Changes to the value of sterling, unemployment and inflation rates;
  • Greater regulatory and compliance risks in areas governed by EU law;
  • The loss of EU labour or the growth in labour costs as a result of increased competition for that labour; and
  • Legal and compliance issues resulting from changes in laws and regulation.

Other matters to think about

Directors should consider the expected cash flows from receipt of debtors and settlement of liabilities, management of borrowing requirements, and contingencies such as litigation in progress.

Other sources of information which should form part of the assessment include:

  • Budgets – covering twelve months from the date of approval of the accounts
  • Cash flow forecasts – projected cash outflows compared with inflows, including the settlement of liabilities, loan repayments, payment of tax, other commitments, etc.
  • Sensitivity analysis – for example whether changes in interest rates or foreign exchange rates will have a significant impact
  • Products, services and markets – are there risks from product obsolescence, competitors or alternatives?
  • Borrowing facilities – requirements, availability, risk of breaching any loan covenants
  • Subsidiary companies – where a group provides support to certain subsidiaries, does it have the resources to provide all the support required?



When directors are aware of significant matters that could impact the going concern basis, these should be disclosed in a note to the accounts. The note should describe the circumstances, for example a net current liability position, and any mitigating factors such as support being provided by the directors or another group company.

When the directors do not prepare financial statements on a going concern basis, they should disclose that fact, together with the basis on which they prepared the financial statements and the reason why the business is not regarded as a going concern.

Get in touch

If you have any questions, please get in touch with Matt Neill, an Associate Director in our Corporate and Business department, at or on 01892 546 546.