Below are some answers to the recent questions we have had around the transition to the new UK GAAP.
- Can I use different GAAPs for different UK companies within my group?
- I voluntarily report under EU-adopted IFRS. Can I change to UK GAAP?
- I have a subsidiary reporting under EU-adopted IFRS. The reduced disclosure framework sounds attractive. Does it mean I can simply remove disclosures from my accounts?
- I have 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?
The Companies Act 2006 sets out the requirement for consistency of financial reporting within a group.
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 (including section 1A (see Q3)) and, if eligible, FRS 101 and FRS 105 (see 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 exceptions 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 (including section 1A) and, if eligible, FRS 101 and FRS 105, 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).
It is up to the directors to form an opinion as to whether there are ‘good reasons’ and 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 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.
The law permitting 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 an EEA regulated market or is the subsidiary of an entity which ceases to be listed on an EEA regulated market, the law allows you to report under UK GAAP, even if you have previously reported under EU-adopted IFRS.
In addition to this, companies that have voluntarily prepared their group or individual accounts under EU-adopted IFRS can change to UK GAAP so long as the entity has not changed from reporting under EU-adopted IFRS to report under UK GAAP in the preceding 5 years.
3. I have a subsidiary reporting under EU-adopted IFRS. The reduced disclosure framework sounds attractive. Does it mean I can simply remove disclosures from my accounts?
It is not quite that simple!
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 EU-adopted IFRS can only be omitted if ‘equivalent disclosures’ are included in the consolidated accounts (see Q7 and Q8). 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 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?
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 identifies 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 US GAAP consolidated accounts on the grounds of materiality must be given in your individual accounts if the information is material to your accounts.