Accounting and Reporting standards from 1 January 2021

The Department for Business, Energy and Industrial Strategy (BEIS) and the Financial Reporting Council (FRC) have jointly published a letter to the accounting and audit sectors setting out the UK’s legal framework for accounting and corporate reporting at the end of the transition period on 31 December 2020.

The information in the letter is particularly relevant for UK incorporated companies, multinational groups with a UK and EEA presence and UK and EEA companies with cross-border listings. It is important to note that for the vast majority of companies the UK’s accounting and corporate reporting regime will remain largely unchanged

The main changes to corporate reporting are as follows:

  • All UK incorporated companies that are currently required to use EU-adopted International Financial Reporting Standards (IFRS) will need to use UK-adopted international accounting standards for financial years that begin on or after 1 January 2021. On 1 January 2021, UK-adopted international accounting standards and EU adopted IFRS will be identical.
  • Companies with financial years ending on 31 December 2020, can continue to use EU adopted IFRS as it stands at the end of the transition period for the 2020 financial year, and UK-adopted international accounting standards for the next financial year.
  • Where new or amended IFRS are adopted by the UK after the transition period, but before those companies file their accounts for the financial years that straddle the end of the transition period, they can choose to apply any new IFRS adopted by the UK in addition to EU-adopted IFRS as they exist at the end of the transition period.

Stock valued at net realisable value

One of the acceptable methods to value stock is at the lower of cost and net realisable value (NRV). NRV is broadly defined as the estimated selling price of an asset less any disposal costs.

HMRC provides the following guidance in their Business Income Manual.

The realisable value is the expected sale price of the relevant stock in the condition in which it is expected to be sold in the trader’s normal selling market. From that value are deducted the estimated further costs which will have to be incurred to get the stock into its normal sale condition to arrive at the net realisable value.

The guidance continues that the net realisable value may be less than cost because of deterioration, obsolescence, or changes in demand. However, at the reporting date there may be a reasonable expectation that the proceeds of sale of some stock in future reporting periods will not produce enough income to cover its cost. If so, a loss on such stock should be recognised in the reporting period under review by writing off the irrecoverable costs incurred.