In the United Kingdom, there is a set of standards in place for annual financial ac­count­ing called the UK GAAP (United Kingdom Generally Accepted Ac­count­ing Prin­ciples). These prin­ciples are set in place by the UK Financial Reporting Council (FRC), and are a national version of the in­ter­na­tion­al ac­count­ing standards set by the IFRS. The ac­count­ing prin­ciples contained in the UK GAAP are only required for listed companies, though many non-listed busi­nesses choose to follow them as well. Following the prin­ciples helps to guarantee con­sist­ency and accuracy in financial reporting, which helps companies to secure the trust of their investors and other stake­hold­ers.

Ac­count­ing standards exist to ensure that accounts are made in a unified and reas­on­able way. They should be com­par­able: so it is easy to compare the financial standing of similar entities. They should be trans­par­ent: leaning in the direction of openness when deciding how to provide in­form­a­tion to observers. Standards make sure the in­form­a­tion in the financial state­ments is relevant: this makes it more difficult for or­gan­isa­tions to misdirect observers.

The aim of the standards is to organise a company in such a way as to provide all of the necessary in­form­a­tion to any in­de­pend­ent observer. The UK GAAP system actually functions under 8 basic standards, all intended to promote the con­sist­ency and trans­par­ency of official financial records.

It goes without saying that capital-market-oriented companies are obliged to protect the interests of their investors and share­hold­ers. Compliant annual financial state­ments aim to provide an objective insight into the economic situation of a company within the scope of the share­hold­er pro­tec­tion principle so that those share­hold­ers can form their own es­tim­a­tion of possible returns and risks. Com­mer­cial books and financial state­ments also assist in tax planning and op­tim­isa­tion. While the UK GAAP is aimed primarily at private companies, publicly listed companies can turn to the IFRS for their statement of com­pli­ancy standards (FRS 102 Section 1A).

Creditor pro­tec­tion, share­hold­er pro­tec­tion, and tax struc­tur­ing are reflected in two basic functions of the annual financial state­ments: How easily the business can pay its bills and the prof­it­ab­il­ity of the business.

  • The income of the business year serves as a basis for the taxation of a company as well as the de­term­in­a­tion of per­form­ance-related dis­tri­bu­tions (dividends and profit sharing)
  • The balance sheet displays the financial health of a company at a point in time and serves as the basis for financial planning and resource al­loc­a­tion.

Annual con­sol­id­ated financial state­ments, when prepared according to uniform ac­count­ing standards, are reliable and mean­ing­ful sources of in­form­a­tion. The UK GAAP has six basic standards, FRS 100 - FRS 105, to help govern financial state­ments in the UK. There are also two ad­di­tion­al standards, SORPS and FRSSE, that apply to companies within specific in­dus­tries or sectors.

What are ac­count­ing standards?

Ac­count­ing standards are national or in­ter­na­tion­al prin­ciples set in various areas of business ac­count­ing. The aim is to regulate book­keep­ing and ac­count­ing in relevant legal areas by means of statutory re­quire­ments, thereby stand­ard­ising the process of reporting on company finances and making state­ments relevant and com­par­able.

For ac­count­ants in the UK, this means a divide between the national standards of the UK FRC and the in­ter­na­tion­al standards of the IFRS. The standards laid out by the FRC in the UK GAAP translate easily to many in­ter­na­tion­al markets. UK companies that have non-UK sub­si­di­ar­ies preparing financial state­ments using an IFRS framework or UK companies that are listed should keep up-to-date on IFRS de­vel­op­ments.

National ac­count­ing standards

Ac­count­ing standards have a long tradition. As early as 5,000 years ago, merchants in Egypt and Meso­pot­amia organised their business using an ancient version of financial state­ments and accounts. In the Roman Empire, bankers were obliged to use sys­tem­at­ic ac­count­ing. Even double-entry ac­count­ing, the most commonly used system of com­mer­cial business income and ex­pendit­ure recording today, found its origins in 17th century northern Italy.

In the United Kingdom, ac­count­ing standards were first in­tro­duced by the Joint Stock Companies Act in 1844. This required the pre­par­a­tion of balance sheets to be presented to share­hold­ers. After the global economic crisis of the 1920s and the stock market crash of 1929, the overly lax ac­count­ing practices of many busi­nesses shouldered a lot of the blame. Without strict standards of financial present­a­tion, companies could ma­nip­u­late their reports to suit whatever needs they had, making their finances appear in better shape than they actually were. The 1929 Companies Act in­tro­duced stricter le­gis­la­tion for company ac­count­ing in an effort to promote a higher level of dis­clos­ure and more uniform ac­count­ing practices. Multiple other de­vel­op­ments followed over the next several decades, including the creation of various governing bodies in charge of stand­ard­isa­tion. Ac­count­ing standards in the UK are now monitored by the FRC, a gov­ern­ment committee that is funded jointly by the ac­count­ancy pro­fes­sion, the financial community, and the British gov­ern­ment.

While the ac­count­ing prin­ciples contained in the UK GAAP only apply to UK companies, there are national ac­count­ing prin­ciples in Canada, France, Germany, the US, China, India, Nepal, and Russia.  Though there is some overlap (for example, Germany has vol­un­tar­ily signed the US GAAP in addition to their own standards), prin­ciples are only really applied to domestic business. Any companies doing business with or from foreign nations typically apply in­ter­na­tion­al ac­count­ing standards, such as the IFRS format.

The ap­plic­a­tion of the IFRS standards is fairly prevalent in the UK, as it allows companies more flex­ib­il­ity in foreign business while main­tain­ing in­ter­na­tion­al com­pli­ancy. IFRS is also required for the con­sol­id­ated accounts of EU listed companies as well as any stock listed companies.

While operating according to IFRS is generally all that’s required for con­duct­ing foreign business, the following table will provide a quick overview of the national ac­count­ing standards for the DACH countries (Germany, Austria, and Switzer­land) as well as the other major players in Europe: the UK (a brief overview), France, Spain, and Italy.

Ac­count­ing standards in Europe
Germany Han­dels­ge­set­zbuch (HGB) The German Com­mer­cial Code (HGB in German) forms the legal basis for the man­age­ment of business books and creation of annual financial state­ments in Germany. This requires every merchant to disclose trans­ac­tions and assets in ac­cord­ance with proper ac­count­ing prin­ciples. Details on these can be found in the Com­mer­cial Code and aren’t ex­pli­citly defined by the le­gis­lature. Instead, the prin­ciples are formed based on educated re­com­mend­a­tions and generally accepted practice. Deutsche Rech­nungsle­gungsstand­ards (DRS) German ac­count­ing standards (DRS in German) must be used if the company in question is a parent company. These standards are set by the German Ac­count­ing Standards Committee (DRSC), a private ac­count­ing body that operates on behalf of the Federal Ministry of Justice (BMJ). Financial state­ments can also be vol­un­tar­ily prepared in ac­cord­ance with the IFRS. These replace HGB and DRS standards, as long as the sup­ple­ment­ary trade reg­u­la­tions are observed. In­ter­na­tion­al Financial Reporting Standards (IFRS) Capital-oriented parent companies, on the other hand, are not held to HBG or DRS standards. Instead, the in­ter­na­tion­al ac­count­ing standards of IFRS re­cog­nised by the EU are applied through­out Europe.
Austria Un­ternehmens­ge­set­zbuch (UG) The German Corporate Code (UG in German) is used in Austria for drawing up annual financial state­ments. Austrian law also refers to the prin­ciples of proper ac­count­ing. Unlike in Germany, these are described directly in the legal text and so are official le­gis­lat­ive standards. IFRS Similar to the situation in Germany, parent companies in Austria have the right to choose between IFRS and the national standard. According to EU reg­u­la­tions though, capital-market-based parent companies must account in ac­cord­ance with IFRS.
Switzer­land Ob­lig­a­tion­en­recht (OR) The Swiss Code of Ob­lig­a­tions (OR in German) contains statutory minimum re­quire­ments for ac­count­ing in Switzer­land. The OR reg­u­la­tions are binding for all com­mer­cial trans­ac­tions of companies and or­gan­isa­tions with account ob­lig­a­tions. Strict rules apply to companies listed on the largest Swiss stock exchange, SIX Swiss Exchange. In this case, it’s required to either follow the re­com­mend­a­tions for ac­count­ing (Swiss GAAP FER) or in­ter­na­tion­al ac­count­ing standards (IFRS). Swiss GAAP FER For Swiss companies listed on the SIX Swiss Exchange in the secondary segment, the re­com­mend­a­tions for ac­count­ing (Swiss GAAP FER) apply as a minimum standard. Companies that aren’t listed can choose to use Swiss GAAP FER for their ac­count­ing as well. These re­com­mend­a­tions include:
  • A framework concept
  • Core expert re­com­mend­a­tions
  • Swiss GAAP FER 30 for con­sol­id­ated financial state­ments
  • Swiss GAAP FER 31 for listed companies
Small companies only have the option to align them­selves with the framework concept and select expert re­com­mend­a­tions. Medium-sized or­gan­isa­tions must observe all standards for their ac­count­ing. The Swiss GAAP FER 30 is also required for companies, co­ordin­ated with the con­sol­id­ated financial state­ments. Exchange-listed companies also must take the Swiss GAAP FER 31 (“Com­ple­ment­ary re­com­mend­a­tion for listed companies”) into account. Industry-specific re­com­mend­a­tions are offered for insurance companies, pension in­sti­tu­tions, non-profit or­gan­isa­tions, health insurers, and building insurers. IFRS or US GAAP Since 2005, a financial statement prepared according to in­ter­na­tion­al standards (IFRS or US GAAP) has been mandatory for Swiss companies listed on the SIX Swiss Exchange in the main segment.
UK New UK GAAP Generally Accepted Ac­count­ing Practice (New UK GAAP) New national ac­count­ing standards have been in place in the UK since January 1, 2015, called the New UK GAAP. The ac­count­ing framework is aimed at non-capital-oriented companies and covers the six standards FRS 100 to FRS 105.
  • FRS 100 - Ap­plic­a­tion of Financial Reporting Re­quire­ments: FRS 100 explains the framework for financial state­ments prepared in ac­cord­ance with national laws, reg­u­la­tions, and ac­count­ing standards.
  • FRS 101 - Reduced Dis­clos­ure Framework: FRS 101 presents a reduced ac­count­ing concept that allows companies to prepare con­sol­id­ated financial state­ments in ac­cord­ance with the in­ter­na­tion­al IFRS re­quire­ments, without having to comply with all IFRS dis­clos­ure re­quire­ments.
  • FRS 102 - The Financial Reporting Standard Ap­plic­able in the UK and Republic of Ireland: FRS 102 is the actual financial reporting standard for the UK and Ireland. This covers 250 pages and replaces all previous Old UK GAAP standards.
  • 103 - Insurance Contracts: FRS 103 contains separate ac­count­ing standards for companies that issue insurance contracts.
  • FRS 104 - Interim Financial Reporting: FRS 104 is based on the in­ter­na­tion­al standard for interim reporting, IAS 34, and serves as a basis for the pre­par­a­tion of interim financial state­ments for companies that use FRS 101 or FRS 102 ac­count­ing.
  • FRS 105 - The Financial Reporting Standard Ap­plic­able to the Micro-entities Regime: FRS 105 is a modified version of FRS 102, directly tailored to the re­quire­ments and needs of micro-en­ter­prises.
The FRS is issued by the Ac­count­ing Standards Board (ASB), a division of the Financial Reporting Council (FRC). IFRS Listed companies also have to prepare accounts according to the IFRS in­ter­na­tion­al ac­count­ing standards in the UK.
France Plan comptable général (PCG) The Comptable Général (PCG) is the minimum standard for the ac­count­ing of non-listed companies in France. The framework contains the following content:
  • Overview of the topics and prin­ciples of the ac­count­ing
  • Defin­i­tion of core concepts such as the balance sheet, profit and loss account, li­ab­il­it­ies, assets, income, as well as profits and losses
  • Present­a­tion of ac­count­ing and valuation rules
  • Account man­age­ment and naming rules
  • Doc­u­ment­a­tion re­quire­ments
  • Special ac­count­ing rules
  • State­ments by the National Audit Office (Conseil National de la Compt­ab­il­ité) and the Committee on Urgency (Comité d’Urgence)
IFRS Like any other EU member state, France also requires listed parent companies to prepare con­sol­id­ated financial state­ments in ac­cord­ance with the IFRS.
Spain Código de comercio (CCom) and Ley de so­ciedades anónimas (LSA) Merchants and trading companies in Spain are also obligated to prepare business books according to com­mer­cial prin­ciples. Cor­res­pond­ing re­quire­ments can be found in the Spanish Com­mer­cial Code (Código de comercio, CCom) and the Spanish Stock Cor­por­a­tion Act (Ley de so­ciedades anónimas, LSA). These are largely based on the European guidelines and differ only slightly. Plan general de con­t­ab­il­id­ad One criticism of the CCom and LSA ac­count­ing standards concerns their overall account plan (Plan general de con­t­ab­il­id­ad, PGC), which was approved by Royal Decree 1514/2007 and is a broad ad­apt­a­tion of the in­ter­na­tion­al ac­count­ing standard IFRS. A sim­pli­fied account plan for small and medium-sized companies is available in ac­cord­ance with Decree 1515/2007. IFRS Spanish capital-oriented parent companies report according to the IFRS, just like all other EU member states.
Italy Codice Civile The legal basis for ac­count­ing standards in Italy is contained in Article 2423 of the Italian Civil Code (Codice Civile, CC). The pos­sib­il­ity of a condensed financial statement is the subject of Article 2435. Ac­count­ing prin­ciples of the OIC An in­ter­pret­a­tion and cla­ri­fic­a­tion of the Italian Civil Code of ac­count­ing prin­cipals is available to companies by the ac­count­ing prin­ciples of the Organismo Italiano di Con­t­ab­il­ità (OIC). In the case of reg­u­lat­ory gaps in the national guidelines, resorting to in­ter­na­tion­al standards (generally IFRS) is possible. IFRS Listed companies and insurance agencies in Italy are required to create in­di­vidu­al and con­sol­id­ated financial state­ments according to IFRS. Non-listed companies are allowed to choose between IFRS and the national standards.

In­ter­na­tion­al ac­count­ing standards

To make annual and con­sol­id­ated financial state­ments that are com­par­able across national borders, in­ter­na­tion­al har­mon­isa­tion has been underway for a number of years. The goal is to provide companies with a uniform framework for financial state­ments. The in­ter­na­tion­al ac­count­ing standards in use today are the IFRS, created by the IASB, as well as the US GAAP, which are used primarily in America but are also applied abroad. The following is a brief overview of these standards.

In­ter­na­tion­ally re­cog­nised ac­count­ing standards
IFRS   The In­ter­na­tion­al Financial Reporting Standards (IFRS) were published by the In­ter­na­tion­al Ac­count­ing Standards Board (IASB) as basic prin­ciples for in­ter­na­tion­al company ac­count­ing. The goal was to achieve a worldwide har­mon­isa­tion of the ac­count­ing system. The framework consists of three parts:
  • Framework: The IFRS framework forms the the­or­et­ic­al basis of the standards as a framework concept. It describes the goals and the main premise of the in­ter­na­tion­al re­quire­ments, as well as qual­it­at­ive re­quire­ments for the IFRS fin­an­cials state­ments. It also provides framework defin­i­tions of the central terms such as assets, li­ab­il­it­ies, income, or expenses.

  • Standards (IFRS/IAS): The actual ac­count­ing and valuation re­quire­ments are in the form of in­di­vidu­al standards. These include both the IFRS from the IASB as well as the IAS (In­ter­na­tion­al Ac­count­ing Standards) from the pre­de­cessor or­gan­isa­tion, the IASC (In­ter­na­tion­al Ac­count­ing Standards Committee).

  • In­ter­pret­a­tions: To unify the un­der­stand­ings of the in­ter­na­tion­al re­quire­ments, the third part of the framework includes official in­ter­pret­a­tions of the standards published by IFRS In­ter­pret­a­tions Committee (IFRS IC).
Ap­plic­a­tion of the IFRS: In the event of a conflict, the IFRS standards and in­ter­pret­a­tions have a higher liability as special reg­u­la­tions than the overall spe­cific­a­tions of the framework. The framework itself doesn’t have a default status. Since 2005, all capital-oriented parent companies with locations in Europe are required to create financial state­ments according to the IFRS.
US GAAP The United States Generally Accepted Ac­count­ing Prin­ciples (US GAAP) are ac­count­ing standards issued by the Financial Ac­count­ing Standards Board (FASB) for the US. They obtain legal status with the approval of the US Se­cur­it­ies and Exchange Com­mis­sion (SEC) as well as the largest pro­fes­sion­al as­so­ci­ation of American auditors, the AICPA (American Institute of Certified Public Ac­count­ants). US GAAP also enjoys a high in­ter­na­tion­al status, since a listing on the US stock exchange requires reporting in ac­cord­ance with the rules of the SEC. Until 2007, foreign companies wishing to meet their capital re­quire­ments on the US capital market were also required to fulfill the US GAAP or a compliant trans­ition to the US standard. But since December 21, 2007, with the ac­cept­ance of the IFRS by the SEC, this re­quire­ment has been omitted.

UK GAAP: Eight main ac­count­ing standards

The New UK GAAP, in place since 2005 and available in the most current version since 2015, provides guidelines for the con­sol­id­ated financial state­ments of listed groups in the UK. The six standards are aimed at non-capital-oriented companies, and are required ac­count­ing standards for listed companies - though those companies may choose to adhere to IFRS ac­count­ing in addition. These standards, FRS 100 - FRS 105, are issued by the Financial Reporting Council and are as follows:

  • FRS 100 - Ap­plic­a­tion of Financial Reporting Re­quire­ments: This lays out the ap­plic­able financial reporting framework for busi­nesses preparing their financial state­ments in the UK and Ireland. While it contains no actual ac­count­ing re­quire­ments, it provides direction toward the relevant standard(s) and provides guidance to be used when in­ter­pret­ing meanings of equi­val­ence or deciding on an ap­plic­able standard.

  • FRS 101 - Reduced Dis­clos­ure Framework: A reduced dis­clos­ure framework is in­tro­duced here which allows IFRS re­cog­ni­tion and meas­ure­ment bases to be used in in­di­vidu­al financial state­ments, without requiring full IFRS com­pli­ancy. It can only be applied by qual­i­fy­ing entities following share­hold­er no­ti­fic­a­tion and a summary of adopted ex­emp­tions in the financial statement.

  • FRS 102 - The Financial Reporting Standard Ap­plic­able in the UK and Republic of Ireland: The single coherent financial reporting standard replacing the old UK GAAP, FRS 102 spans 250 pages and covers ac­count­ing re­quire­ments for a number of different areas. A group must be a parent or sub­si­di­ary of a group that prepares public con­sol­id­ated accounts in order to be able to take ad­vant­ages of the dis­clos­ure ex­emp­tions contained in FRS 102.
  • FRS 103 - Insurance Contracts: This section con­sol­id­ates existing guidance on insurance contracts contained within the IFRS and requires dis­clos­ure that iden­ti­fies and explains financial state­ments resulting from insurance contracts, relates the financial strength of the entities, and helps users of the financial state­ments com­pre­hend them.
  • FRS 104 - Interim Financial Reporting: Intended as a basis for the pre­par­a­tion of interim financial reports for entities applying FRS 102, this standard can also be applied by entities that prepare their interim reports according to FRS 101. It outlines the minimum content of a financial interim report and the necessary dis­clos­ures.
  • FRS 105 - The Financial Reporting Standard Ap­plic­able to the Micro-entities Regime: This late addition is a modi­fic­a­tion of the FRS 102, and is directly tailored to suit micro-en­ter­prises. This elim­in­ates the need for qual­i­fy­ing entities to prepare some primary state­ments which are required for larger companies, and requires fewer dis­clos­ures than FRS 102.
  • FRSSE: The Financial Reporting Standard for Smaller Entities (FRSSE) combines all of the standards for small companies, and can also be extended to micro-entities. It is ap­plic­able to any companies or groups that qualify as small under the 2006 Companies Act.
  • SORPS: The State­ments of Re­com­men­ded Practice (SORPs) are sup­ple­ment­ary standards that exist for a range of specific entities and in­dus­tries. Their current version reflects the re­quire­ments of the FRS 102, and is intended to be used in co­oper­a­tion with those standards of the UK GAAP.

Ac­count­ing standards in the UK: Com­par­is­on of the GAAP and IFRS

While the ac­count­ing standards of the UK GAAP specify practices for certain types of business, the IFRS is still widely accepted in the United Kingdom as the in­ter­na­tion­al standard. Companies can choose to conform to IFRS standards even if their business category is one of those governed by the UK GAAP, which can be par­tic­u­larly helpful when con­duct­ing global business. Listed groups, re­gard­less of whether they choose to integrate IFRS, are required to follow the UK GAAP for their financial state­ments.

Any busi­nesses that operate in the public sector are not governed by the UK GAAP, and so instead must follow the rules laid out by the IFRS.

The following table presents the main dif­fer­ences between the UK GAAP and IFRS, as shown in financial state­ments with regard to itemisa­tion and content:

  UK GAAP IFRS
Assets held for sale
  • No defin­i­tion or required re­clas­si­fic­a­tion of held for sale
  • Considers items as held for sale if their value will be recovered through sale rather than use
Dis­con­tin­ued op­er­a­tions
  • Items are con­sidered dis­con­tin­ued when they are sold or ter­min­ated
  • Shift of op­er­a­tion­al focus causes items to be con­sidered dis­con­tin­ued
Goodwill
  • Goodwill is li­quid­ated over 20 years and annually tested
  • Tested annually for impair­ment and not li­quid­ated
Impair­ment
  • All assets reviewed for in­dic­at­ors of impair­ment at the balance sheet due date
  • All assets reviewed for impair­ment in­dic­at­ors at each reporting date, and in­def­in­ite assets reviewed annually
Pension costs
  • Cal­cu­lated based on per­cent­age of pen­sion­able pay and li­quid­ated on a straight line basis
  • Cal­cu­lated based on scheme assets and li­ab­il­it­ies and adjusted annually
Deferred taxation
  • Provided on all timing dif­fer­ences, but not on re­valu­ation gains
  • Re­cog­nised on all temporary dif­fer­ences, including re­valu­ation of assets
Cash and cash equi­val­ents
  • No equi­val­ent defin­i­tion
  • Defined as short-term, highly liquid in­vest­ments with a maturity of less than 90 days and readily con­vert­ible into cash
Dividends
  • Re­cog­nised as an expense in the period of de­clar­a­tion
  • Re­cog­nised as a reserve in the period of approval

Summary of sig­ni­fic­ant dif­fer­ences between New UK GAAP and IFRS ac­count­ing standards / Source: http://www.wikinvest.com

Prudence principle vs. accrual principle

The focus on the capital market means that in­vest­ment-oriented finance reports based on in­ter­na­tion­al standards are aimed at meeting needs within a given period. IFRS state­ments are based on the accrual principle  - income and expenses are recorded in the period in which they’re generated and not in the period in which the payment receipts or payments actually appear. By contrast, the UK GAAP places a larger emphasis on the prudence principle that strives to remove spec­u­la­tion from the reporting of fact-based financial data. The prudence principle is intended to protect lenders from the overly op­tim­ist­ic present­a­tion of fin­an­cials. For example, revenue is not re­cog­nised unless it is certain. Please note the legal dis­claim­er relating to this article.

Reviewer

Go to Main Menu