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United Kingdom

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Financial reporting framework in the United Kingdom


Adoption of IFRSs in Europe effective in 2005

In June 2002, the European Union adopted an IAS Regulation requiring European companies listed in an EU securities market (both debt and equity) , including banks and insurance companies, to prepare their consolidated financial statements in accordance with IFRSs starting with financial statements for financial year 2005 onwards. EU countries have the option to:

  • Require or permit IFRSs for unlisted companies.
  • Require or permit IFRSs in parent company (unconsolidated) financial statements.
  • Permit companies whose only listed securities are debt securities to delay IFRS adoption until 2007.
  • Permit companies that are listed on exchanges outside of the EU and that currently prepare their primary financial statements using a non-EU GAAP (in most cases this would be US GAAP) to delay IFRS adoption until 2007.

The European IAS regulation applies not only to the 28 EU Member States but also to the three members of the European Economic Area (EEA) - Iceland, Liechtenstein, and Norway.

The United Kingdom is an EU Member State. Consequently, UK companies listed in an EU/EEA securities market follow IFRSs since 2005. The European Commission (EC) periodically issues a document which summarises the use of options of the IAS Regulation by European Union Member States. For information on each country's plans, click to access:

The European Commission has adopted the following wording for use in the notes to the accounts and in the audit reports of companies subject to EU Regulation 1606/2002/EC (the 'IAS regulation'):

  • "in accordance with International Financial Reporting Standards as adopted by the EU" or
  • "in accordance with IFRSs as adopted by the EU".

The UK Auditing Practices Board also requires companies subject to the IAS regulation to state, in a footnote, compliance with IFRSs as adopted by the IASB, if that is the case. 

Companies Not Subject to the EU IAS Regulation

The IAS Regulation applies to only the consolidated financial statements of companies within its scope.  Listed companies with no subsidiaries, typically investment trusts, may continue to use UK GAAP under the law and the Listing Rules. The IAS Regulation also gives member states an option to permit or require the use of IFRSs as adopted in the EU in other cases such as within individual financial statements of listed companies and the consolidated and individual financial statements of unlisted companies. In the UK, this has been implemented to allow companies, other than charities, to prepare their individual and/or group financial statements in accordance with either UK GAAP or IFRSs as adopted by the EU. This is subject to certain constraints about consistency within groups. 

Companies with securities admitted to trading on the Alternative Investment Market (AIM) of the London stock exchange are not subject to the EU IAS Regulation. AIM rules require an AIM company incorporated in an EEA country to prepare its consolidated financial statements in accordance with IFRSs.

All other UK companies, for their consolidated financial statements, are permitted to use IFRSs or to adopt UK GAAP -being 'old UK GAAP' (effective for periods commencing on or before 31 December 2014) or 'new UK GAAP' (see below for more details).

Small companies may elect to report under the Financial Reporting Standard for Smaller Entities (FRSSE), which gives exemptions from applying all other accounting standards. However, in July 2015, the FRC issued FRS 105 that replaces the FRSSE. FRS 105 is effective for periods beginning on or after 1 January 2016, with early adoption permitted.

Sources of accounting requirements

There are both mandatory and advisory sources of generally accepted accounting principles (GAAP) in the United Kingdom:

  • Company Law - The Companies Act 2006.
  • Financial Reporting Standards (FRS) issued by the FRC - see 'old UK GAAP' and 'new UK GAAP' below.
  • Listing Rules of the London Stock Exchange and AIM rules.
  • Statements of Recommended Practice (SORP)
  • Financial Reporting Standard for Smaller Entities (FRSSE)
Companies Act

The directors of all companies registered under the Companies Acts are required to produce financial statements that comply with the requirements of the Act. Among the requirements of the Companies Act are the following:

  • Financial statements are required to give a true and fair view of the profit or loss for the financial year and the state of affairs at the end of it.
  • Duty to keep accounting records
  • Duty to prepare individual company accounts
  • Duty to prepare group accounts
  • Disclosure of related undertakings
  • Disclosure of emoluments and other benefits to directors and others
  • Duty to prepare directors' report
  • Auditors' report

The Companies Act requires disclosure of whether applicable accounting standards have been followed. However it does not make them part of the law.

The Companies Act is administered by the Department for Business, Innovation and Skills (BIS). BIS is responsible for the development and administration of Company Law (apart from subjects which are the responsibility of Companies House). It keeps under review legislation on companies and partnerships and considers proposals for reform.

Old UK GAAP

Old UK GAAP comprises a number of Financial Reporting Standards (FRSs), Statements of Standard Accounting Practice (SSAPs) and Urgent Issue Task Force (UITF) Abstracts.

Each of the 30 FRSs and eight SSAPs currently in force includes requirements for a particular area of accounting, while the UITF Abstracts provide specific interpretations of accounting issues arising from application of the FRSs and SSAPs. 

Old UK GAAP may be used by all UK groups and entities not required by law or regulation to apply EU-adopted IFRSs.

Existing UK GAAP will remain effective for periods commencing on or before 31 December 2014. For periods beginning on or after 1 January 2015, all previously effective FRSs, SSAPs, UITF Abstracts will be withdrawn and the requirements of New UK GAAP will become applicable. 

New UK GAAP

For periods beginning on or after 1 January 2015, three new Financial Reporting Standards (FRS 100, 101 and 102) will be in force, bringing with them a number of new options for all UK entities and groups. 

The three new FRSs have been developed by the Accounting Standards Board (‘ASB', the predecessor of what is now the Accounting Council of the FRC) to replace Old UK GAAP (other than the FRSSE, which will be retained) and introduce an IFRS-based reduced disclosure framework for certain entities. 

In addition to the above three standards, the Financial Reporting Council (FRC) has also issued another standard, FRS 103 applicable to those entities that have insurance contracts and are applying FRS 102.   

Companies who operate within specialised industries or sectors will also apply the requirements of their specific Statement of Recommended Practice (SORP) in conjunction with the Financial Reporting Standards.

The new Standards can be summarised as follows:

  • FRS 100 Application of financial reporting requirements. FRS 100 sets out the applicable financial reporting framework for entities preparing financial statements in accordance with legislation, regulations or accounting standards applicable in the United Kingdom and Republic of Ireland.
  • FRS 101 Reduced Disclosure Framework. FRS 101 introduces a new reduced disclosure framework enabling most subsidiaries and parents to use the recognition and measurement bases of IFRSs in their individual entity financial statements, while being exempt from a number of disclosures required by full IFRSs.
  • FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland. FRS 102 is a single coherent financial reporting standard replacing old UK GAAP. Derived from the IFRS for SMEs, the Financial Reporting Council has made significant modifications to address company law requirements and incorporate additional accounting options.
  • FRS 103 Insurance Contracts. FRS 103 contains specific accounting requirements for entities with insurance contracts.
  • FRS 104 Interim Financial Reporting. FRS 104 is intended for use in the preparation of interim financial reports for those entities that apply FRS 102 but may also be used as a basis for preparing interim reports by those entities applying FRS 101. The Standard is based on IAS 34 Interim Financial Reporting.
  • FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime. FRS 105 is based on FRS 102 but its accounting requirements are adapted to satisfy the legal requirements applicable to micro-entities and to reflect the simpler nature and smaller size of micro-entities.

All New UK GAAP standards can be accessed free of charge on the FRC website.

 

Correction list for hyphenation

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