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IFRS in the UK

International Financial Reporting Standards (IFRSs) have been a part of financial reporting in the United Kingdom since 2005 when EC Regulation 1606/2002 (‘the IAS Regulation’) came into effect. The IAS Regulation requires companies with securities (either equity or debt) admitted to trading on a regulated market of any member state of the European Union to use ‘international accounting standards’ in preparing their consolidated financial statements.

In this context, ‘international accounting standards’ means standards (International Accounting Standards and International Financial Reporting Standards) issued by the IASB and interpretations issued by the IFRS Interpretations Committee (and its predecessor, the Standing Interpretations Committee) that have been endorsed by the EU. 

EU endorsement

The process for endorsement of a new standard or interpretation (or a change to an existing standard or interpretation) has both a technical level and a political level. The technical merits of each new or amended standard or interpretation are considered by the European Financial Reporting Advisory Group (EFRAG) which is a private sector body. EFRAG makes recommendations to the Accounting Regulatory Committee (ARC), which comprises representatives of the member state governments of the EU and advises the Commission. The UK is represented on ARC by the Department for Business, Energy and Industrial Strategy (BEIS). The final decision on endorsement is formally made by the European Commission.

EFRAG maintains a list of the standards and interpretations that have not yet been endorsed.

A company required to apply IFRS as adopted by the European Union may apply a standard or interpretation that has not been endorsed at the date of approval of its financial statements only if it does not conflict with an existing standard that has been endorsed.

Many companies (particularly Foreign Private Issuers subject to the rules of the U.S. Securities and Exchange Commission) seek to state compliance with IFRSs as issued by the IASB as well as with IFRSs as adopted by the European Union. This is generally possible, but may require the adoption of a new standard ahead of its mandatory application date as determined by the EU.  

Companies with securities admitted to trading on a regulated market

The European Securities and Markets Authority (ESMA)maintains a list of EU regulated markets which is updated from time to time. The Financial Conduct Authority also maintains a list of regulated markets in the United Kingdom. Currently, this list comprises:

  • London Stock Exchange – Regulated Market;
  • CME Europe;
  • The London Metal Exchange;
  • ICE Futures Europe;
  • NEX Exchange Main Board (formally ICAP Securities & Derivatives Exchange – Main Board);
  • Euronext London; and
  • BATS Europe

It should be noted that 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. Similarly, companies with securities admitted to trading on a regulated market may use UK GAAP in preparing their ‘company only’ financial statements.

The Alternative Investment Market (AIM) is not a regulated market within the scope of the IAS Regulation. However, the AIM rules require any AIM company incorporated in an EEA country (being any EU member state, Norway, Iceland, Liechtenstein or (for the purposes of the AIM rules) the Channel Islands and Isle of Man) to prepare accounts under IFRS as adopted by the European Union. 

Use of IFRSs by other companies

The Companies Act 2006 allows companies, other than charities, to prepare their individual and/or consolidated financial statements in accordance with either UK GAAP or IFRSs.  This is subject to certain constraints about consistency within groups as discussed below.  Companies that are charities must continue to prepare their individual and group financial statements in accordance with UK GAAP.

Where companies prepare both individual and group financial statements, the choice between IFRSs and UK GAAP operates separately for each.  A company that is required by Article 4 of the IAS Regulation to use IFRSs for its consolidated financial statements still has a free choice of using IFRSs or UK GAAP for its individual financial statements.  Similarly, a company outside of the scope of the IAS Regulation that has chosen to use IFRSs for its consolidated financial statements does not have to use IFRSs for its individual financial statements.  Although less likely, it is also possible by law for a parent company to prepare IAS individual financial statements while preparing UK GAAP consolidated financial statements.

The Act requires that consolidated and individual financial statements (when required) are published together.  This continues to apply where the consolidated and individual financial statements are prepared using different frameworks.  The Act does not specify whether the financial statements should be presented as separate sections of the report or combined together into a single set of primary statements and notes.  In practice, the statements will be clearer if the separate section approach is taken when two frameworks are combined in a single document.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.