Draft International Accounting Standards and European Public Limited-Liability Company (amendment etc.) (EU Exit) Regulations 2019

Kelly Tolhurst Excerpts

Wednesday 20th March 2019 General Committees

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Kelly Tolhurst)]

I beg to move,

That the Committee has considered the draft International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019.

It is a pleasure to serve under your chairmanship, Mr Pritchard. The regulations aim to address failures of retained EU law to operate effectively in the field of accounts and reports of UK corporate bodies. They also address certain other deficiencies arising from the UK’s exit from the EU.

The international financial reporting standards are a set of international accountancy standards written for use by multinational companies when producing their annual accounts. The International Accounting Standards Board publishes those standards after consultation with its international stakeholders. The standards are required or permitted for use in more than 125 countries, including in all European economic area countries and in 15 of the G20.

Standardising financial reporting across the globe helps lower costs for businesses and enhances investor confidence in company reporting. For companies, using the IFRS reduces the burden of complying with multiple reporting requirements, if they are listed or have operations in different countries. Investors also find it easier to compare the accounts of companies in different jurisdictions when companies use the same set of standards to prepare their annual accounts.

EU regulation 1606/2002, known as the IAS regulation, requires that all publicly traded companies must use IFRS, as endorsed and adopted by the EU, when preparing consolidated accounts for their groups. In the UK, the Companies Act 2006 also permits other UK companies to produce their accounts in accordance with IFRS. Overall, approximately 15,000 companies in the UK use the standards to prepare their annual accounts.

The IAS regulation also sets out the provision for an endorsement process to adopt international accountancy standards for use in the EU. Once the UK leaves the European Union, the EU framework for adopting the IFRS will no longer apply. The regulations in front of the Committee aim to provide continuity and clarity to business by bringing the European framework for adopting IFRS into UK law. That will ensure that UK-registered companies will not have to change their processes for preparing annual accounts.

The power to endorse and adopt IFRS for use in the UK will be transferred to the Secretary of State. The responsibilities transferred to the Secretary of State will be bound by the process and the required scrutiny set out in the regulations. First, any new or amended international financial reporting standard must be considered against certain assessment criteria before it can be endorsed for use in the UK. Those criteria are consistent with those used by the European regulation and they include that the standards provide a “true and fair” view of an undertaking’s financial position; and their adoption is conducive to

“the long-term public good in the United Kingdom”.

Secondly, the regulations set out that for all proposed endorsement decisions on new or amended IFRS the Secretary of State must consult stakeholders with an interest in the quality and availability of accounts, and the final decisions must be published. Finally, the Secretary of State will also be required to lay a report before Parliament each year, detailing the carrying out of his or her responsibilities to endorse and adopt the IFRS. That will ensure that Parliament has an opportunity to hold the Secretary of State to account for adoption decisions.

The regulations provide for sub-delegation of endorsement and adoption powers to a designated UK body. A subsequent affirmative SI will transfer the powers to a new UK IFRS endorsement board. We expect that endorsement board to be hosted by a subsidiary of the Financial Reporting Council. As such, it will benefit from the FRC’s existing operational processes, such as the human resource function and premises. The FRC’s role will be limited to monitoring the governance and due process of the endorsement board. It will have no role in the process of adopting those standards.

As hon. Members will be aware, in December the independent review of the FRC published a comprehensive and detailed report that made 83 recommendations. The Government welcome and share the review’s vision for a new regulator, with a new mandate, new leadership and stronger statutory powers, and we will take swift action to deliver that. The role of the FRC in relation to the endorsement board will be transferred to the new regulator once it is operational.

The Government have worked closely with businesses and regulatory bodies while developing the regulations. Informal consultations were carried out with companies, their advisers and investors. In addition, a dedicated stakeholder group helped to inform the decisions about these regulations. Stakeholders were strongly in favour both of establishing a UK framework for the continued use of IFRS, and of consultation before a standard is adopted for use in the UK.

The draft regulations also make amendments relating to the societas Europaea or SE, a specific European type of public limited liability company that cannot be registered in the UK after EU exit. Regulations have been made to ensure that any entities registered in the UK on exit day will have a clear legal status by automatically converting those entities to a new corporate form, a UK societas.

The amendments relating to those entities do three things. First, they preserve a particular employee involvement provision, ensuring that employment rights have been maintained wherever practical. Secondly, they apply the Overseas Companies Regulations 2009 to SEs registered in other member states. This will ensure that UK branches of entities registered in other member states are treated in the same way as UK branches of any other overseas company. Finally, they make a number of minor consequential amendments to other legislation, such as replacing references to “SE” with “UK societas” where necessary to ensure that the UK has a functioning statute book on and after exit day.

The Government carried out a de minimis impact assessment of the regulation, as the overall cost to the businesses was established as being small. The annual net direct cost to business of the IFRS-related changes was estimated to be £2.4 million a year. The estimated impact for the SE-related changes was £10,400 a year. Both figures are below the £5 million threshold necessary for a full impact assessment.

In conclusion, these regulations provide continuity and clarity to business by setting out a framework for continued use of IFRS in the UK. I therefore commend them to the Committee.

--- Later in debate ---

[Kelly Tolhurst]

I am grateful to the hon. Gentleman for his contribution. International financial reporting standards are a world-leading set of accounting standards, used by a large number of companies in the UK, the EU and other countries around the world. Their use helps inform decision making, improves transparency and promotes confidence in the business environment. As we leave the EU, it is vital we maintain the integrity of the UK system of accounting and reporting.

I remind the hon. Gentleman that we are talking about a statutory instrument that would transfer the current rules that we already work to within the European Union and how the EU applies those rules across member states. In the event of our exit from the EU, we are bringing together a UK framework. It is important to bear that in mind. This is about how we develop a successful framework that enables us to maintain our position as a great place to do business, and reassures investors and companies of that.

We are the biggest capital market outside the US and, therefore, it is right for us to have the regulations; I am sorry to hear that the hon. Gentleman has concerns about them. Having worked through them as a Minister, I think they are sensible and would enable the UK to carry on securely.

I will answer some of the points raised by the hon. Gentleman. The stakeholder group was established in April 2018 to look at the regulations, and it held six meetings. That group included investors, accountants, advisers and business representatives who took part in the meetings as independent individuals. They were asked to participate because of their knowledge, expertise and potential to help in this area, to work with us to look at the technical information and ensure that any regulations brought forward would be in good order.

As the hon. Gentleman mentioned, there was no public consultation on the regulations, but we held informal stakeholder meetings of those affected and interested parties over a long period, from 2018.

With regard to the hon. Gentleman’s comments on the FRC, we welcomed the review undertaken by Sir John Kingman and we will bring forward primary legislation on that point. I must point out that the endorsement board will be a subsidiary of the FRC. It is not currently constituted. The regulations will enable the Secretary of State to have those powers and he will be able to sub-delegate them to an endorsement board.

We are working with FRC officials, and the Secretary of State has full oversight of the development of the EB and its design. He will eventually appoint a chair, shape governance and have full political oversight. The EB will be run separately, as a subsidiary; it will have its own running costs and will be funded through a levy, which organisations that have to comply with FRC rules currently pay to the FRC.

One good thing about the endorsement board and its being structured within the FRC is the future thought leadership that the board will give. It will really be able to influence, on the international stage, any future developments in IFRS standards. That area will be key for the endorsement board going forward.

[Bill Esterson]

Earlier, I put to the Minister her Department’s statement to the House of Lords Committee that it was working with the FRC to have the new endorsement board ready in time for EU exit. I take it, from what she just said, that that will not happen. Will she confirm that? Will she also confirm the arrangements for the work that the new endorsement board will undertake once it is set up?

[Kelly Tolhurst]

I am sorry; I thought I had already outlined that to the hon. Gentleman. The Secretary of State has those powers, which will he will sub-delegate to the endorsement board. We are working to develop that board, and our intention is that it will be in place by the end of 2019. I thought I had made that clear.

The Secretary of State will have the power to sub-delegate, but he will also have the power to revoke powers sub-delegated to the endorsement board in the future. To clarify, and to give Members comfort that political oversight will continue, the hon. Gentleman was quite right that the Secretary of State will have to report to Parliament annually, and the endorsement board that carries out these tasks in the future will also report annually to the Secretary of State. Those reports will be placed in the Commons Library. Even when there is an endorsement board, the Secretary of State will still lay an annual report in Parliament, which will give an opportunity for parliamentary scrutiny and for the Secretary of State to be scrutinised and held to account for particular activities of the endorsement board when that sub-delegation has occurred.

On the hon. Gentleman’s comments on whether we are lobbying the US to follow IFRS standards more closely, that is not something I am directly involved with. The draft regulations are very much about making sure that the UK is able to maintain its place in the global market. As an independent nation after EU exit, we will have the opportunity to make sure that we have a wider influence in the world on the adoption and formulation of standards.

As I have outlined, the draft regulations will provide continuity and clarity to business by ensuring that UK companies can continue to use IFRS, as adopted in the EU, when preparing their annual accounts. They also set out a future adoption framework for the UK that is robust and transparent, and that will act in the national interest. This framework has been developed in close consultation with stakeholders, as I have outlined, and represents the best way forward for the UK’s continued use of these international standards. I therefore commend the draft regulations to the Committee.

Question put and agreed to.