The Future of UK GAAP Explained

Business

  • Author Marc Voulters
  • Published December 10, 2010
  • Word count 600

UK GAAP is an abbreviation for UK Generally Accepted Accounting Practice and you may or not have been aware that very substantial changes are taking place in the way that accounts are produced and published throughout the UK. This article explains the background to the changes, what they are likely to involve and how they will affect the different types of businesses operating in the UK today.

The Accounting Standards Board (ASB) is responsible for setting the standards throughout UK accountancy. Its role was enshrined in the wording of the Companies Act 1985 and since 1990, it has replaced the old Accounting Standards Committee (ASC). In October 2010 it was due to publish a paper entitled "The Future of UK GAAP", which was to lay the ground towards further adoption of International Financial Reporting Standards (IFRS) for Small and Medium Size Enterprises (SMEs).

At present, all UK listed companies have to prepare their financial statements following IFRS, but non-listed companies generally adopt UK GAAP. And then smaller businesses can also use another system again, the Financial Reporting Standard for Smaller Entities, known as FRSSE. This obviously creates something of a divide between the larger, typically listed companies and many SMEs.

This situation does obviously lead to some difficulty for business comparisons; the different regimes produce financial statements which don’t closely resemble each other in many key ways. Therefore the move towards uniformity for financial statements should finally bring some ease of understanding between all the different types of entities. This has obvious advantages for businesses in that their statements would be much more readily comparable by interested parties, including international readers. Being able to readily compare statements (plus in the case of international readers, a greater degree of familiarity) might well help to open up some important new business opportunities.

As of August 2009, the ASB seemed to be proposing a three tier approach as follows:

Tier 1 – Publicly accountable entities would use IFRS, as adopted by the EU.

Tier 2 – Most other UK entities could apply the IFRS for SMEs

Tier 3 – Finally, the smaller entities could choose to apply the FRSSE

Whilst initially, this does sound as through all but the smallest businesses would use IFRS, there is a certain level of further variation which could happen. Businesses in either Tier 2 or 3 would be allowed to use the IFRS adopted by the EU if they wanted to. And then Tier 3 businesses would be allowed to use the IFRS for SMEs - or stick to the FRSSE. So it probably wouldn’t transpire that all entities adopted a common framework, but on the whole, there would probably be more a more unified approach to essential accounting.

Around the time the consultation was taking place, there were concerns raised about what might happen in the FRSSE was withdrawn, since it is widely used by those smallest concerns. It was speculated that the IFRS might place an inappropriate financial reporting burden on very small businesses.

Equally, concerns were raised about the impact of continuing to allow its use, which some parties felt might lead to an ever wider divergence between the larger businesses and smaller business reporting results. Furthermore, the close relationship between the FRSSE and the current UK GAAP might serve to exacerbate this divide.

Although it remains to be seen how it will all develop, changes are most definitely underway for UK SMEs. The overall move towards International Financial Reporting Standards does seem to be gaining momentum. The most sensible advice is undoubtedly to develop a good working relationship with professional Chartered Accountancy services to guide your business through all the changes as they arise.

Marc Voulters is the Audit Partner with SRLV, a London firm offering Business Consultancy and Chartered Accountancy services for over 20 years from their premises in the heart of London’s West End.

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