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The changing face of UK GAAP

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9th Sep 2013
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Accounting standards first arrived on the UK scene in 1970 when the Accounting Standards Committee (ASC) was set up with the specific objective of developing definitive standards for financial reporting: Statements of Standard Accounting Practice (SSAPs), explains Paul Gee.

Two decades later, the Financial Reporting Council (FRC) was set up in 1990, and ASC was replaced by the prolific Accounting Standards Board (ASB) which subsequently issued 30 Financial Reporting Standards (FRSs). 

These covered a broad range of areas, some mainstream (for example, FRS 3, reporting financial performance and the FRSs on consolidations and acquisition accounting) and some more specialised.

ASB issued two particularly important standards unique to UK financial reporting: FRS 5, reporting the substance of transactions; and FRSSE, the Financial Reporting Standard for Smaller Entities. Both have had a significant impact, and the FRSSE will be retained in the short-term at least, within the new UK GAAP regime.

ASB also had to get to grips with some particularly thorny issues including:  Goodwill (FRS 10), pension cost accounting (FRS 17 which replaced the discredited SSAP 24); and deferred tax (FRS 19, following earlier controversial standards SSAP 11 and SSAP 15). ASB chairman, Sir David Tweedie, was always up for a challenge!

But in recent years the general view was that UK GAAP was broken, and that it needed a major overhaul. ASB commented in January 2012 that:

“Current FRSs are a mixture of ‘old’ FRSs and ‘new’ standards that are converged with IFRS. This leads to the possibility of unintended consequences where standards were not developed from a consistent framework, and ‘gaps’ in the literature, for example, where currently only quoted companies are required to account for financial instruments…”

Converging UK GAAP with IFRS

This story has had many twists and turns. Full IFRS became mandatory in the UK for full list companies in 2005, and for AIM-listed in 2007. At one time, it looked as though unlisted companies would follow them and eventually move to full IFRS. However it was becoming increasingly apparent that for unlisted companies IFRS would bring in too much complexity and excessive disclosure in relation to the needs of users.

The publication of the International Financial Reporting Standards (IFRS for SMEs) in July 2009 seemed to offer an alternative way forward for UK financial reporting. It was clear that a major advantage of the IFRS for SMEs was significantly reduced disclosure. It also used recognition and measurement principles that were broadly aligned with those in full IFRS. The problem was that some of these offered less choice than existing UK GAAP, and the standard as published contained a number of inconsistencies with the Regulations to CA 2006.

ASB issued a number of exposure drafts, proposing amendments to the IFRS for SMEs and setting out the scope of a new standard, resulting in the issue of FRS 102 – commonly referred to as the new UK GAAP – in March 2013.

UK today – before it is all changed

Companies - other than small companies who adopt the Financial Reporting Standard for Smaller Entities (FRSSE) – are required to comply with the following requirements:

  • Statements of Standard Accounting Practice (SSAPs)
  • Financial Reporting Standards (FRSs)
  • Urgent Issues Task Force Abstracts
  • The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 [SI 2008/ 410]

Small companies are required to comply with The Small Companies and Groups (Accounts and Directors’ Report) Regulations [SI 2008/ 409], and may adopt either the Financial Reporting Standard for Smaller Entities (FRSSE), or full UK GAAP.

Some entities, for example charities, are required to comply with Statements of Recommended Practice (SORPs).

UK GAAP today is predominantly historical cost based, with some revaluation and fair value options. In the future, UK GAAP will contain more requirements and options to apply fair values for specific financial statement areas.

The new UK GAAP

All existing SSAPs, FRSs and UITF Abstracts, with a few exceptions, will be replaced by FRS 102 (The Financial Reporting Standard in the UK and Republic of Ireland). FRS 102 - the new UK GAAP - becomes mandatory for accounting periods beginning on or after 1 January 2015, although it may be adopted earlier.

Paul Gee BA (Econ) FCA is a regular contributor to a number of Bloomsbury Professional financial reporting titles. He has extensive experience of training and advising accountants on all aspects of financial reporting and audit.

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