RSM’s Financial reporting resources brings together technical guidance and expertise on the various reporting standards and frameworks.
Whether you require support on the first-time adoption of a new standard, or specific advice relating to an existing framework, our financial accounting and advisory specialists can help.
Bridging the GAAP is our essential guide to IFRS, UK GAAP and narrative reporting developments. Discover what the key recent financial reporting developments have been and learn how they might affect you.
Understanding which financial reporting framework is applicable to your business
The financial reporting framework that applies to UK entities preparing financial statements is set out in FRS 100 Application of Financial Reporting Requirements. FRS 100 sets out five options for preparing financial statements:
Financial reporting frameworks
- Any entity can report under EU adopted IFRS, except charities, and it is unlikely to be suitable for small entities.
- FRS 101 may only be applied by qualifying entities which are members of a group where the parent of that group prepares publicly available consolidated financial statements.
- All entities can choose to report under FRS 102 except those required to apply EU adopted IFRS.
- Only small or micro entities can apply FRS 102 Section 1A.
- Only micro entities can apply FRS 105.
Frequently asked questions
1. Can I use different GAAPs for different UK companies within my group?
The financial reporting frameworks that can be applied under the Companies Act 2006 (“Act”) are:
- Companies Act individual accounts; or
- IAS individual accounts
To comply with the Act, a parent company and each of its subsidiaries must prepare their financial statements using the same financial reporting framework.
Entities within your group could apply a mixture of FRS 102 (including section 1A) and, if eligible, FRS 101 and FRS 105 as these all fall within the same framework (Companies Act individual accounts).
Alternatively, all entities within your group could apply UK-adopted International Accounting Standards (IAS individual accounts).
There are two exceptions to the ‘consistency rule’ in the Act.
Firstly, if the parent company’s accounts and the group accounts, are prepared using UK-adopted International Accounting Standards. In this instance, (subject to the second exemption noted below), your subsidiaries can either apply a mixture of FRS 102 (including section 1A) and, if eligible, FRS 101 and FRS 105, or they can all apply UK-adopted International Accounting Standards. FRS 105 will, however, rarely be applied by group companies as the micro-entity provisions do not apply to company accounts that are included in group accounts or to a parent company that prepares group accounts.
Secondly, if there are ‘good reasons’ for using different frameworks.
The Act provides no definition of or guidance on what constitutes ‘good reasons’. However, when listed companies were required to prepare their consolidated financial statements in accordance with International Accounting Standards for the first time, the Department for Business, Energy & Industrial Strategy (BEIS) (then the Department for Business Enterprise and Regulatory Reform (BERR)) issued guidance that directors must be able to justify use of inconsistent frameworks to shareholders, regulators or other interested parties.
The guidance included examples of ‘good reasons’, such as:
- it may not be practical for a newly acquired subsidiary to switch to EU-adopted International Accounting Standards in the first year of acquisition;
- some subsidiaries use EU-adopted International Accounting Standards because their securities are publicly traded, but this does not necessarily justify use of EU-adopted International Accounting Standards by the non-publicly traded subsidiaries;
- a subsidiary or the parent converts to EU-adopted International Accounting Standards as it plans to apply for a listing; and
- the costs of switching frameworks for minor or dormant subsidiaries outweigh the benefits.
It is therefore up to the directors to form an opinion as to whether there are ‘good reasons’ for applying an inconsistent financial reporting framework within the group.
2. I voluntarily report under UK-adopted International Accounting Standards. Can I change to UK GAAP?
The Companies Act 2006 (“Act”) permits a company to move from UK-adopted International Accounting Standards to UK GAAP only when there is a ‘relevant change of circumstance’.
So, if your company ceases to be a subsidiary, becomes a subsidiary of a parent that does not adopt UK-adopted International Accounting Standards in its individual accounts, is no longer listed on a UK-regulated market or is the subsidiary of an entity which ceases to be listed on a UK-regulated market, the Act allows you to report under UK GAAP, even if you have previously reported under UK-adopted International Accounting Standards.
In addition to this, companies that have voluntarily prepared their group or individual accounts under UK-adopted International Accounting Standards can change to UK GAAP so long as the entity has not changed from reporting under UK-adopted International Accounting Standards to report under UK GAAP in the preceding 5 years.
3. I have a subsidiary reporting under UK-adopted International Accounting Standards. The reduced disclosure framework sounds attractive. Does it mean I can simply remove disclosures from my accounts?
FRS 101 accounts must comply with the Companies Act and associated Regulations.
To adopt FRS 101 (the 'reduced disclosure framework'), the subsidiary’s results, assets and liabilities must be consolidated in publicly available financial statements that are intended to give a true and fair view.
Some disclosures otherwise required by UK-adopted International Accounting Standards can only be omitted if ‘equivalent disclosures’ are included in the consolidated accounts. Other exemptions, for example share-based payment disclosures, are subject to further conditions.
FRS 101 accounts must also include a brief narrative summary of the disclosure exemptions adopted, the name of the parent in whose accounts the subsidiary’s results, assets and liabilities are consolidated and from where those consolidated financial statements may be obtained.
4. I have a subsidiary reporting under UK-adopted International Accounting Standards. My parent is listed on the New York Stock Exchange and reports under US GAAP. Can I use the reduced disclosure framework?
You could be eligible to apply the reduced disclosure framework set out in FRS 101 as your parent’s consolidated US GAAP accounts will be publicly available, should be intended to give a true and fair view and should consolidate your results, assets and liabilities.
A number of the reduced disclosures are only permitted if your parent’s consolidated US GAAP accounts include equivalent disclosures. Disclosures can be equivalent even if they do not strictly conform to each and every requirement in UK-adopted International Accounting Standards. FRS 100 Application of Financial Reporting Requirements provides further guidance and identifies US GAAP as one of the GAAPs that is equivalent to UK-adopted International Accounting Standards.
Disclosures in your parent’s consolidated US GAAP accounts that aggregate the information that would have been provided in your accounts with similar information for other entities may also be equivalent.
However, disclosures not given in the US GAAP consolidated accounts on the grounds of materiality must be given in your individual accounts if the information is material to your accounts.