Are you ready for the end of parent company guarantees?

Companies previously exempt from audit by way of parent company guarantees may no longer be eligible after the Brexit transition period. Giles Mullins looks at the potential impact of this change to company law.

Section 479A of the Companies Act 2006 allows subsidiaries of undertakings established under the law of a European Economic Area (EEA) state to be exempt from a statutory audit under parent company guarantees.

Exemption is conditional upon compliance with the following rules:

• All members of the company must agree to the exemption in respect of the financial year
• The parent undertaking must give a guarantee under section 479C in respect of that year
• The company must be included in the consolidated accounts of the parent company
• The parent undertaking must disclose that the company is exempt from audit of its individual accounts
• The directors of the company must deliver to the registrar copies of these accounts and various statements confirming adherence to the Companies Act

We're seeing the use of parent company guarantees becoming more popular to combat the general increase in audit fees across the industry.

What’s changing with parent company guarantees?

For accounting periods beginning after the Brexit transition period ends on 31 December 2020, parent company guarantees will only be available to subsidiaries of UK undertakings. They will not apply to UK subsidiaries that would otherwise be consolidated into a parent undertaking that is established in an EEA state.

For those subsidiary undertakings previously exempted from having an audit, there is the potential for significant upheaval for finance teams in readiness for this change.

Reporting requirements for parent company guarantees

For those instances where the exemption will continue to apply, the parent undertaking must prepare consolidated accounts, including the subsidiary, in accordance with:

• Part 15 of the Companies Act 2006, if the undertaking is a company
• The legal requirements for preparing consolidated accounts for that undertaking, if it is not a company
• UK-adopted international accounting standards

As before, parent company guarantees must then be provided by the parent undertaking. 

What’s the impact for parent company guarantees?

Now is the time to consider whether parent company guarantees will still be available. Companies that previously didn't need to worry about an audit must now be confident that their systems, processes and controls can stand up independently to the level of scrutiny of the auditor, so as not to detriment the group as a whole.

What this means in practice is more work for your finance team, which strains the ability of the team to perform business as usual (BAU) during audit fieldwork.

On a practical level to help the audit go smoothly, you should consider the following questions:

• Do you have papers written to explain how you have accounted for significant and judgmental area transactions and balances that are likely to face added scrutiny?
• Are your ledgers clean and reconciled?
• Do you have supporting evidence for all large and unusual balances?
• Are your accounting policies up to date?
• Have you considered the balances most likely to require management judgement and ensured these are reviewed prior to the finalisation of the financial information?
• How will you manage BAU and remote working during the audit?

Where we can help

We know that facing an audit for the first time can be a stressful situation for any finance team. Our experienced finance professionals can help prepare you and stay by your side while the audit is ongoing.

Our key areas of expertise are:

Finance remediation projects

We support finance teams who are faced with significant challenges or changes. Collaboratively working with your finance team, we develop and deliver a clear project plan and effective solution.

Expert support for your finance team

If you are struggling with a lack of capacity, resource or expertise in your finance team, we can help. We provide interim support at a variety of levels to create bandwidth and deliver on agreed goals.

To learn more about how we can help you get through your first audit after the end of parent company guarantees, get in touch with Giles Mullins.