New UK GAAP: we’re ready, are you?
The UK’s Generally Accepted Accounting Principles (GAAP) includes all accounting standards, company law and other guidance that affect how accounts should be prepared in the UK.
There are some fundamental changes to this, which may affect your business. The new UK GAAP includes Financial Reporting Standard (FRS) 102 (the key element for most businesses), as well as FRS 100, FRS 101, FRS1 05 and FRS 103.
Implementing the new accounting standards can be complex and we have answered some key FAQs here, which may be of use.
We have experts across the UK ready to guide you through the transition so contact us to find out how we can help you to implement the changes.
To find out more, you can also visit our FRS 102 Hub.
Browse through our FAQs to find out how the new accounting standards could affect you.
1. Do I still have a choice of using EU-adopted IFRS or UK GAAP?
2. Can I use different GAAPs for different UK companies within my group?
3. I am a small company (but not a micro-entity) and I do not currently use the FRSSE. I do not intend to apply EU-adopted IFRS or FRS 101 - will I have to switch to FRS 102?
4. I am a very small company. Are there any additional accounting exemptions that I can take advantage of?
5. I voluntarily report under EU-adopted IFRS. Will I be able to switch to FRS 102?
6. I am a subsidiary reporting under EU-adopted IFRS. The reduced disclosure framework sounds attractive. Does it mean I can simply remove disclosures from my accounts?
7. I am a subsidiary reporting under EU-adopted IFRS. My parent is listed on the New York Stock Exchange and reports under US GAAP. Can I use the reduced disclosure framework?
8. Are there many disclosures that I can remove from my accounts if I take the reduced disclosure option?
9. I am a public benefit entity. How will the changes affect me?
10. I am a limited liability partnership. How will the changes affect me?
11. I currently follow a SORP for my accounts. Will this still be required?
12. Will the changes to Company Law to implement the EU Accounting Directive affect FRS 102 or FRS 101?
13. When do I have to start implementing the changes?
14. I will apply FRS 102 in my annual accounts; will my interim accounts also be affected by FRS 102?
The new standards do not affect the requirement for listed entities to apply EU-adopted IFRS in their consolidated accounts and other entities, except charities, can still choose to apply EU-adopted IFRS if they want to.The small company regime can be applied by entities that qualify as small under the Companies Act (see Q3), and the micro-entity regime may be applied by companies that are eligible to adopt it (see Q4).
However, all previous UK accounting standards and guidance have been, (or in the case of the FRSSE will be), replaced with the requirements of FRS 102 and, for micro-entities, FRS 105 (see Q4).
Qualifying entities have the option of ‘reduced disclosures’ in their individual accounts prepared under FRS 102 if they meet certain conditions. Reduced disclosures are also available to qualifying entities in their individual accounts that otherwise comply with EU-adopted IFRS, by application of FRS 101 (see Q6-Q8).
If you are a member of a group, your choice may be restricted by the ‘consistency rule’ (see Q2).
Accounts prepared using FRS 102, FRS 101, FRS 105 or the FRSSE, while it is still available, are Companies Act Accounts and, therefore, need to meet the requirements of the Companies Act and associated regulations.
To comply with the Companies Act, a parent company and each of its subsidiaries must apply one of two available frameworks (the ‘consistency rule’). Entities within your group could apply a mixture of FRS 102, FRS 101 and (where applicable) FRS 105 or the FRSSE (see Q3 & Q4) as these all fall within the same framework (known as 'Companies Act Accounts').
Alternatively, all entities within your group could apply EU-adopted IFRS, which is the second framework (known as 'IAS Accounts').
There are two exemptions to the ‘consistency rule’ in the Companies Act:
Firstly, if the parent company’s accounts and the group accounts, are prepared using EU-adopted IFRS. In this instance, (subject to the second exemption noted below), your subsidiaries can either apply a mixture of FRS 102, FRS 101, and (where applicable) FRS 105 or the FRSSE (see Q3 and Q4), or they can all apply EU-adopted IFRS. 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 (e.g. if there was a charity in the group, since they are prohibited from adopting IFRS).
It is up to the directors to form an opinion as to whether there are ‘good reasons’ and the then Department for Business Enterprise and Regulatory Reform (BERR) (now the Department for Business Innovation and Skills (BIS)) issued guidance that directors must be able to justify use of inconsistent frameworks to shareholders, regulators or other interested parties. The BERR guidance includes examples of ‘good reasons’ such as:
it may not be practical for a newly-acquired subsidiary to switch to EU-adopted IFRS in the first year of acquisition;
some subsidiaries use EU-adopted IFRS because their securities are publicly traded, but this does not necessarily justify use of EU-adopted IFRS by the non-publicly traded subsidiaries;
a subsidiary or the parent converts to EU-adopted IFRS as it plans to apply for a listing but the rest of the group is not planning to apply for a listing; and
the costs of switching frameworks for minor or dormant subsidiaries outweigh the benefits.
If you meet the Companies Act definition of a small company, you have the option to use the FRSSE but only for a very limited time as the FRSSE will be withdrawn for accounting periods beginning on or after 1 January 2016. Thereafter, you must apply the recognition and measurement requirements of FRS 102 if you do not intend to apply EU-adopted IFRS or FRS 101 and are not eligible to adopt FRS 105 (See Q4).
If you have interest rate swaps or foreign exchange rate forward contracts, a big change will be that these must be shown in your balance sheet at their fair values, subject to transition exemptions for periods starting before 1 January 2017. Those fair values are re-measured every year and any increase or decrease will affect your reported profit or loss.
If you previously applied the FRSSE, you will also have a new requirement to measure share-based payments, such as certain employee share options, at fair value, subject to transition exemptions for those granted in the comparative and prior periods.
Your accounts will have to comply with the presentation and disclosure requirements throughout FRS 102, unless you choose to apply the presentation and disclosures for small entities in Section 1A of FRS 102 and you also adopt the amendments to Company Law. Section 1A and the changes to Company Law both apply to periods beginning on or after 1 January 2016, but can be applied early provided they are both applied at the same time. If you apply Section 1A you will only need to give the legal disclosures that apply to small companies, which are fewer than those required by FRS 102, unless other information is necessary for your accounts to show a true and fair view. In addition, you need not present a statement of changes in equity.
No small company (whether or not it applies the small companies’ regime) is required to present a statement of cash flows for periods beginning on or after 1 January 2016. This exemption may be adopted for earlier accounting periods if all amendments to FRS 102 and Company Law are also adopted early (see below).
Even if you are a growing business, you may continue to be a small company for some time as the recent changes to the Companies Act significantly increase the size thresholds to qualify as 'small. The turnover limit increases to not more than £10.2m (from £6.5m) and the gross assets limit increases to not more than £5.1m (from £3.26m).
The new small company regime and the new small company size limits apply from 1 January 2016. You can apply both a year earlier (for periods beginning on or after 1 January 2015) if you wish to do so, but you must also adopt all the other changes to Company Law at the same time.
If you are a very small company, you may be able to benefit from the recognition and measurement simplifications available to micro entities (see Q4).
Yes; if you are a micro-entity as defined below.
Certain companies are excluded from being micro-entities, such as public companies and companies that undertake certain insurance and finance activities, along with some companies which are part of a group.
Companies that are not excluded must meet two or more of the size criteria for turnover (of not more than £632,000), gross assets (of not more than £316,000) and employees (of not more than 10).
Micro-entities that are companies can adopt the micro-entities regime in the FRSSE or in FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime (FRS 105). FRS 105 is mandatory for periods beginning on or after 1 January 2016, when the FRSSE will be withdrawn, but you can adopt it a year earlier (from 1 January 2015).
FRS 105 looks very similar to FRS 102 but the recognition and measurement is simplified so financial instruments are not measured at fair value, you do not need to account for deferred tax or share-based payments and the accounting for defined benefit pension schemes is less complex. There are also a number of presentation exemptions in FRS 105, and very limited disclosures, in fact only three.
However, if you apply FRS 105 your assets, including investment properties, cannot be revalued in your accounts and there are no accounting policy choices, so you cannot capitalise development costs or borrowing costs and you must adopt the accruals model to account for grants. If these policies are not appropriate to your business, you may decide not to adopt FRS 105.
Under company law companies that have voluntarily prepared their individual accounts under EU-adopted IFRS can change to UK GAAP, i.e. FRS 102, FRS 101 or (where applicable) FRS 105 (see Q4) or the FRSSE, while it is still available, (see Q3), so long as the entity has not changed from reporting under EU-adopted IFRS to report under UK GAAP in the preceding 5 years.
The law that permits a company to move from EU-adopted IFRS to UK GAAP following a ‘relevant change of circumstance’ remains. So, if your company ceases to be a subsidiary, becomes a subsidiary of a parent that does not adopt EU-adopted IFRS in its individual accounts, is no longer listed on a regulated market or ceases to be a subsidiary of such an entity, the law allows you to report under UK GAAP, even if you have previously reported under EU-adopted IFRS.
It is not quite that simple!
To adopt FRS 101 (the 'reduced disclosure framework'), your results, assets and liabilities must be consolidated in publicly available financial statements that are intended to give a true and fair view and your shareholders must be noti?ed in writing and not object to the use of the disclosure exemptions.
Some disclosures can only be omitted if ‘equivalent disclosures’ are included in the consolidated accounts (see Q7 and Q8 below). Other exemptions, for example share-based payment disclosures, are subject to further conditions.
As explained in Q1, FRS 101 accounts must comply with the Companies Act and associated Regulations. This means your accounts must apply Companies Act balance sheet and profit and loss account formats and include disclosures required by the Companies Act and the Regulations.
Application of the Companies Act formats will be easier following changes to Company Law that permit more flexible profit and loss account and balance sheet formats which allow FRS 101 accounts to be presented in accordance with EU-adopted IFRS (see Q12). The new flexible formats apply from 1 January 2016 but you can apply them from 1 January 2015 if you adopt all the other changes to Company Law at the same time.
In addition, EU-adopted IFRS is amended to comply with the Companies Act, including changes to the presentation and recognition of negative goodwill and the presentation of government grants.
FRS 101 accounts must include a brief narrative summary of the disclosure exemptions adopted, the name of the parent in whose accounts the entity’s results, assets and liabilities are consolidated and from where those consolidated financial statements may be obtained.
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 EU-adopted IFRS. FRS 100 Application of Financial Reporting Requirements provides further guidance and identi?es US GAAP as one of the GAAPs that is equivalent to EU-adopted IFRS.
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 consolidated accounts on the grounds of materiality must be given in your individual accounts if the information is material to your accounts. There are other conditions that must be met to use the reduced disclosure framework (see Q6 & Q8).
Depending on the circumstances, the disclosure exemptions could be quite significant.
You can choose to take advantage of all or any of the available disclosure exemptions, subject to meeting certain conditions (see Q6 & Q7). In addition, for your FRS 101 accounts to comply with Company Law, you may have to add disclosures, change presentations and make other amendments to the EU-IFRS accounts (see Q6).
You have the option not to prepare a cash flow statement. However, the other reduced disclosure options in FRS 101 (and FRS 102) only apply to certain items (such as share-based payments and financial instruments) and in certain cases only to some of the disclosures for those items.
FRS 101 has more disclosure exemptions than FRS 102 (such as for business combinations, impairments, capital management, comparative tangible and intangible asset reconciliations) because FRS 101 applies to accounts that otherwise comply with EU-adopted IFRS and many of the disclosures required by EU-adopted IFRS are not required under FRS 102.
In addition, some disclosures will be required by Company Law (such as for certain financial instruments measured at fair value) even when there is an exemption from the disclosure requirements of EU-adopted IFRS or FRS 102.
The exemptions available to financial institutions (bank, building society, stock broker etc.) are restricted, for example, they cannot omit all the financial instrument disclosures.
FRS 102 applies equally to public benefit entities but there are certain paragraphs that are solely applicable to them. These deal with issues relevant and specific to the public benefit sector, including incoming resources from non-exchange transactions, concessionary loans and public benefit entity combinations. In addition, you must make a statement in your financial statements that you are a public benefit entity.
As well as applying FRS 102 you must continue to apply any relevant SORP (see Q11).
FRS 100 applies to limited liability partnerships (LLPs) in the same way as to other entities. You have the choice of applying EU-adopted IFRS, FRS 101 if you are a qualifying entity, or FRS 102. The LLP SORP has been aligned with FRS 102 (See Q11) and applies to LLPs that adopt FRS 102 or the FRSSE. The LLP SORP does not apply to LLPs that comply with EU-adopted IFRS or FRS 101.
Small LLPs can apply the FRSSE until it is withdrawn (see Q3) when they must apply the recognition and measurement requirements of FRS 102, unless EU-adopted IFRS or FRS 101 is adopted.
Whether you qualify as a small LLP will be based on the size limits in the Small LLP Regulations which are not yet aligned with those applicable to companies.
The Department for Business Innovation and Skills (BIS) is currently consulting on changes to the LLP Regulations, which are expected to be amended during 2016, to align with the changes to Company Law.
Once the LLP Regulations are revised, a small LLP that adopt FRS 102 is expected to be able to apply the small entity presentation and disclosure requirements in section 1A of FRS 102, provided their accounts include the disclosures required by the revised Small LLP Regulations and the LLP SORP.
LLPs cannot currently apply the micro-entity regime in FRS 105 as they are not companies (see Q4) but changes to the LLP Regulations are expected to include a micro-entity regime for LLPs.
Entities within the scope of a SORP will continue to apply the relevant SORP.
However, FRS 102 may not be adopted early if its application would conflict with applicable SORP or legal requirements.
The SORPs for Pension Schemes, Charities, Limited Liability Partnerships (LLPs), Further and Higher Education, Registered Providers of Social Housing, Authorised Funds, and Investment Trust Companies and Venture Capital Trusts have been updated to be consistent with FRS 102 and may be further amended for the July 2015 revisions to FRS 102.
Other existing SORPs will be withdrawn including those applying to Banking, Leasing, and Accounting for Oil & Gas.
In addition, the SORP for Insurance is withdrawn for accounting periods beginning on or after 1 January 2015 and replaced with FRS 103 ‘Insurance Contracts’.
The position for some charities is more complex.
Unincorporated charities in England and Wales that prepare their accounts in accordance with the Charities Act must adopt either FRS 102 or the FRSSE 2015 (depending on eligibility) and the related SORP. These charities, however, face a conflict when preparing their accounts for periods commencing on or after 1 January 2015 because the applicable legislation still refers to the extant SORP 2005. This conflict is not an issue for charities that are companies as they are subject to the accounting requirements of the Companies Act rather than the Charities Act.
It is unclear when this conflict will be rectified as publication of the revised Charities (Accounts and Reports) Regulations for England and Wales continues to be delayed.
In the meantime, in order to meet the overriding requirement in the Charities Act to prepare ‘true and fair’ accounts, these charities can adopt either FRS 102 or the FRSSE 2015, as appropriate, by including a true and fair override to the applicable legislation in their accounts. The Charity Commission has published guidance on its website with appropriate true and fair override wording.
Any charity that adopts the Charities SORP (FRSSE) for 2015 will face further changes when the FRSSE is withdrawn (see Q3). From 2016 all charities will move to a single SORP, the Charities SORP (FRS 102), as amended by the SORP Update Bulletin 1. Earlier adoption of the single SORP is permitted from 1 January 2015, unless this is prohibited by regulations or charity or company law.
Yes; from periods starting on or after 1 January 2016, unless you choose to adopt all the changes to Company Law earlier.
To align with the revisions in Company Law, FRS 102 is amended to:-
prohibit the reversal of past impairment losses for goodwill;
restrict the useful economic life of intangible assets (including goodwill) to not more than ten years in the exceptional circumstances when the useful economic life cannot be reliably estimated;
require some minimum disclosures about provisions and contingencies, partially removing the “seriously prejudicial” exemption; and
reflect other minor amendments.
FRS 101 is amended to:-
permit flexibility in the pro?t and loss account and balance sheet formats in the Companies Act to permit the presentation in EU-adopted IFRS (see Q6);
remove the amendment to the accounting for contingent consideration arising on a business combination; and
If you are not already preparing your new UK GAAP accounts, you should start preparing to do so as soon as practicable.
If you are adopting FRS 102 or FRS 101, the start of your comparative period has already passed so the new standards could affect the way you account for transactions that have already taken place.
For example, if you have a 30 September year end, you will have to apply the new standards in your annual accounts to 30 September 2016 with comparatives for the year 1 October 2014 to 30 September 2015.
If you have started a new business or set up a new company it may be a good idea to apply the new standards early to avoid changing frameworks within a short time frame, for example if your first accounts cover the 18 month period ending on 31 March 2016. You could also be part of a group that can take advantage of the reduced disclosure framework and obtain significant cost savings as a result.
For small and micro-entities that wish to use (or continue using) the small company regime or micro-entity regime in the FRSSE the provisions that replace the FRSSE (Section 1A of FRS 102 and FRS 105 respectively) are not mandatory until periods commencing on or after 1 January 2016, but you could already have passed your comparative period (1 January 2015 to 31 December 2015, if you have a December year-end).
There may be advantages to adopting the small or micro-entity regimes early. For example, if you have started a new business or set up a new company it may be a good idea to apply the new standards early to avoid changing frameworks within a short time frame.
There could be other advantages to adopting the new standards early, so you could benefit from talking to us as soon as possible.
Your interim accounts will reflect differences between previous UK GAAP and FRS 102.
If you are required by the Disclosure Rules and Transparency Rules (DTR) to make a statement that your interim report has been prepared in accordance with pronouncements on interim reporting issued by the FRC, you must apply FRS 104 Interim Financial Reporting, otherwise use of FRS 104 is voluntary.
FRS 104 has fewer disclosures than FRS 102. It sets out the content of interim reports, including the periods to be presented, and how to apply FRS 102 recognition and measurement requirements in interim accounts.
FRS 104 also provides guidance on interim accounts prepared in accordance with FRS 101.