What balance sheet risks arise from Brexit?

Seminar paper from the year 2019 in the subject Business economics - Accounting and Taxes, grade: 1.7, University of Münster, language: English, abstract: This paper seeks to identify macroeconomic risks due to Brexit and how these risks influence the subsequent measurement of assets under IAS 36 Impairment of Assets. The central research question is whether Brexit leads to an increased impairment risk for German corporations with cross-border relations. To investigate the question, chapter 2 discusses the UK’s relevance to the German economy and explains the relevant procedures under IAS 36. Chapter 3 analyses the macroeconomic changes since the referendum and derives macroeconomic risks for future economic development. Finally, the paper examines the impact of identified macroeconomic risks on key assumptions of impairment testing under IAS 36. An illustrative example of a German car manufacturer with production and dis-tribution in the UK shall demonstrate a potential impairment risk due to Brexit. The analysis closes with a critical evaluation of impairment testing in the context of Brexit. The scope of the paper encompasses German corporations which prepare financial statements in accordance with IFRS. "What is happening is a disaster for the economy, looking at it from a purely economic point of view", states C. Pissarides, a Nobel Prize-winning economist, commenting on the United Kingdom’s (UK) exit from the European Union (EU). The referendum in June 2016 has triggered a series of unfavourable changes in the UK’s economic climate, which in turn has affected other European countries. Numerous businesses in and outside of the UK are suffering from political uncertainties due to the fear of a disorderly Brexit and the accompanying macroeconomic effects, e.g. devaluation of the British pound and declining con-sumer demand in the UK. Foreign companies that are exposed to the UK through trading relationships, especially those with cross-border supply chains and operations, are required to reassess the future of their businesses in the UK due to adverse market prospects.German companies with close relations to the UK can be directly and indirectly affected by economic changes due to Brexit. It is therefore necessary to examine whether and to what extent the economic changes need to be reflected in entities’ financial statements. Particular attention should be paid to the faithful presenta-tion of companies’ assets and liabilities.