The Wall St. crash of 1929, as well as its aftermath, made very obvious the amount of ma­nip­u­la­tion and fraud taking place when it came to financial reporting. One of the main lessons learned from this infamous event was that there was a great need for effective and far-reaching forms of stand­ard­ised ac­count­ing. Since then, there have been ongoing attempts made to just that and bring about a more uniform way of book­keep­ing. This has led to the emergence of the GAAP – generally accepted ac­count­ing prin­ciples. Simply put, these are the au­thor­it­at­ive standards and rules that govern financial ac­count­ing and reporting by busi­nesses.

What is the aim of the GAAPs?

The overall goal is to provide an overview of the company’s financial per­form­ance over a certain time period, as well as its current financial position. Busi­nesses across the globe follow general standards and guidelines when it comes to preparing financial state­ments. These standards vary from country to country, with each re­spect­ive nation generally having both a private ac­count­ing sector and some state-led reg­u­lat­ors. This then means that each country will have standards, methods, and reg­u­la­tions specific to them. In general, GAAPs can be seen as more of an umbrella term to cover es­sen­tially universal prin­ciples. This article provides an overview of the GAAPs par­tic­u­larly relevant to the United Kingdom. Anyone looking to do more in-depth and detailed reading on them can find them on the Financial Reporting Council website.

Im­ple­ment­ing GAAPs – how and why?

Globally there is  a push to bring about greater uni­form­ity when it comes to financial state­ments. Growing glob­al­isa­tion means there is a need for a common language to allow company accounts to be in­ter­preted and un­der­stood all around the world, re­gard­less of one’s business or ac­count­ing back­ground. It is for this reason that the In­ter­na­tion­al Financial Reporting Standards (IFRS) have emerged. These were es­tab­lished by the In­ter­na­tion­al Ac­count­ing Standards Board (IASB) and continue to be main­tained by this or­gan­isa­tion. 

Small and medium-sized en­ter­prises will sometimes lean towards following more sim­pli­fied standards, in addition to any specific re­quire­ments advocated by their re­spect­ive lenders and/or share­hold­ers. Some countries have local, country-specific ac­count­ing prin­ciples that are then applied to regular companies, while larger and/or listed companies are expected to conform to IFRS. The idea behind this is that these financial state­ments are able to be un­der­stood in­ter­na­tion­ally. Since 2005, all listed and grouped companies within the EU have been required to use the IFRS; something which then extends to all listed companies in the UK. Although their overall purpose is to improve the trans­par­ency of financial state­ments, they do not actually guarantee that the afore­men­tioned state­ments are error-free, or indeed that they are not purposely missing certain in­form­a­tion.

Are the GAAPs legally binding?

It can’t be stressed enough that they are still only ‘generally accepted’ ac­count­ing prin­ciples, standards, and methods. While there is no doubt that they help to bring about more trans­par­ency and un­der­stand­ing when it comes to financial state­ments, this does not ne­ces­sar­ily guarantee that they will ensure that the re­spect­ive financial state­ments will be free of mistakes or mis­cal­cu­la­tions. Such errors or omissions could be purely ac­ci­dent­al or else have the intention of mis­lead­ing the likes of potential investors.

GAAPs in the UK

In the UK it is the Companies Act 2006 that is the primary le­gis­la­tion when it comes to financial reporting. This act has in­teg­rated European law, which since 2005 has required that all listed European companies adopt the IFRSs. Another aspect of the Companies Act is that it requires limited companies to file their accounts and financial state­ments with Registrar of Companies, who in turn make them publicly available.

GAAPs in the UK have seen a greater movement towards the prin­ciples of the IFRS, and this stand­ard­isa­tion has meant the dif­fer­ences between the two have been greatly reduced. Unlisted companies in the UK have the choice of whether they wish to report under IFRSs or under UK GAAPs. However the recent im­ple­ment­a­tion of then new FRSs (see below) means that there are now even more sim­il­ar­it­ies shared with IFRSs.

Old GAAPS vs. New GAAPs

Since 1 January 2015, there has been a change in the GAAPs in the UK. These de­vel­op­ments have not affected companies pre­vi­ously subject to EU-IFRS laws and reg­u­la­tions. These companies continue to do so. On the other hand, companies who do not wish to follow the EU-IFRS standards can choose from FRS 100, 101, FRS 102, FRS 103, FRS 104, and FRS 105. The table below outlines the details of these various standards:

FRS 100 The financial reporting guidelines for any business entities preparing financial state­ments that fit with the le­gis­la­tion and ac­count­ing standards of the United Kingdom and the Republic of Ireland.
FRS 101 Reduced Dis­clos­ure Framework – allows most sub­si­di­ar­ies and parent companies to use the re­cog­ni­tion and meas­ure­ment guidelines of the IFRSs in their re­spect­ive financial state­ments, while not having to disclose everything that is required.
FRS 102 As of 1 January 2016, this replaced the FRSSE (Financial Reporting Standard for Smaller Entities) and is mostly relevant for SMEs. It differs from its UK GAAP pre­de­cessor in that it includes re­quire­ments for the likes of goodwill, in­tan­gible assets, group benefit schemes, and deferred tax. Companies adopting these standards can take advantage of ex­emp­tions relating to the pre­par­a­tion of cash flow state­ments and related notes.
FRS 103 These are ac­count­ing re­quire­ments spe­cific­ally for entities with insurance contracts.
FRS 104 Interim Financial Reporting - based on IAS 34 Interim Financial Reporting, this is intended for use entities applying both FRS 102 and 101.
FRS 105 Micro-entities standard – very similar to the FRS 102 outlined above, however the ac­count­ing re­quire­ments are slightly altered to suit the legal re­quire­ments of very small companies (also known as micro-entities), who usually have more basic financial state­ments.
Summary

A look at the evolution of the generally accepted ac­count­ing prin­ciples down through the years show that they have become more and more complex. This can be at­trib­uted to the fact that, in general, financial trans­ac­tions have also become more complex. However, this has certainly not changed the fun­da­ment­al purpose of the GAAPs. In fact, if anything these de­vel­op­ments have made it in­creas­ingly important and it is very likely that they will remain an integral part of ac­count­ing and book­keep­ing for the near future.

With Brexit and Britain’s departure from the European Union looming, questions have of course been raised about what effect this will have on GAAPs in the UK. There is a consensus that it is in the best interests of Britain and British companies to maintain use of the IFRSs. Firstly, the IFRSs are more than just European wide; they are seen as being the worldwide standard for the reporting of financial state­ments are now a re­quire­ment for public companies in 120 jur­is­dic­tions around the globe. It is for this reason that the UK should strongly consider con­tinu­ing implement IFRSs as this would maintain its appeal as a place to do business to foreign companies and investors. In a post-Brexit Britain, remaining within the IFRS jur­is­dic­tion would allow the UK gov­ern­ment to not only influence IFRS de­vel­op­ment, but also to decide whether some sort of en­dorse­ment process (like that enjoyed by the EU) is to be required in the UK.

Please note the legal dis­claim­er relating to this article.

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