The prime purpose of financial accounting and reporting is to provide valuable and relevant information that is of value and eases the decision-making process of investors, creditors and other resource providers so that they can make well-informed, rationale and logical investment, credit and related decisions. As per the institute of Chartered Accounts in England and Wales, the primary goal or objective of financial reporting or statements is to provide detailed, objective and accurate report about the financial condition and health of an organization or business so that the performance of the company as well as its top management can be assessed by investors, creditors and other resource provider.
UK GAAP (Generally Accepted Accounting Practice) in the United Kingdom is a set of accounting regulations which sets the rules and regulations pertaining to the preparation of company accounts in the United Kingdom. IFRS (International Financial Reporting Standards) was developed by International Accounting Standards Board (IASB) in 2002. It was introduced to replace IAS standards which was prepared by International Accounting Standards in 1973. The primary objective of introducing International Financial Reporting Standards was to present investors and other parties interested in financial statements to compare and contrast the financial performance and stability of international companies. In the following paragraphs we shall deal in detail with the similarities and differences in UK GAAP and IFRS.
The Financial Reporting Council (FRC) has issued three new accounting principles that will impact how companies operating in the UK will file their accounting statements.
The Accounting Council (AC) and its predecessor, the Accounting Standards Board (ASB) have developed a new financial reporting framework for organizations operating in the UK. The new reporting framework based on International Financial Reporting Standards (IFRS) is applicable to all organizations barring those whose scale of operation is small and the companies operating in the Republic of Ireland. The prime purpose for which these standards were introduced was to eliminate ambiguity so that the organizations could follow them without any hassle and in the process considerably bring down the cost as well as the complexity associated with preparing financial statements.
Nature, impact and overall scope of the change
What has changed?
FRC has made the following changes:
Previously there were guidance like FRSs, SSAPs, and UITFs, which now have been replaced by a single guidance known as Financial Reporting Standard (FRS 102).
Reduced disclosure standards for parent companies and subsidiaries of groups that prepare consolidated financial statements which are publicly available ((FRS 101).
The need to temper with UK GAAP
The book containing the rules and regulations of UK GAAP was mammoth and bulky. The reason for the bulk of the book was several modifications, additions and alterations that took place over the years. A flurry of changes in recent years has bridged the gap to an extent with International Financial Reporting Standards (IFRS) but it still lacked consistency in principles.
In addition, ‘old UK GAAP’ guidance was in need of urgent reforms for accounting for financial instruments. This was necessitated to include common transactions that went unnoticed on the balance sheet.
The Financial Reporting Council (FRC) made these changes to devise pragmatic solutions for organizations keeping their size, scale of operation, level of complexity, public interest and need for information by general public among other things.
What are the prominent changes made?
The Accounting Standards Board (ASB) in course of developing the exposure draft (FRED 48), has suggested following changes:
A broad range of entities have now been made eligible to apply FRS 102, the new UK GAAP. Also, it has done away with previous restriction that stipulated that only ‘publicly accountable’ entities can apply for IFRS.
Noticeable changes in draft (FRED 48) include:
Previously it was defined as to what can be called a ‘financial institution’ .This definition has expanded.
Also, additional guidelines has been provided as to determine whether an arrangement is a lease in itself or for that matter contains a lease.
Biological assets can be subjected to fair value model on the discretion of accounting policies of an entity.
The Accrual method of accounting was previously available for all grants. This provision has been struck down and now it is only available for government grants.
IFRS 4 no longer applies to insurance contracts. In fact, a new accounting standard (FRS 103) is being developed for insurance contracts.
When the new changes or frameworks came into effect?FRS 100, FRS 101 and FRS 102 came into existence for accounting periods beginning on or after 1 January 2015.
Will the changes have any impact on Limited Partnerships?
Yes. The new standards will have an impact limited partnerships, trusts, and offshore companies that currently apply UK GAAP.
Is the disclosure relief applicable to financial intuitions?
FRS 100 and FRS 101 lays down the terms and conditions for what can be constituted as financial institutions. These include:
- Credit unions
- Broker-dealers or stockbrokers
- Friendly societies along with Banks and building societies
- Investment trusts
- Unit trusts
- Venture capital trusts
- Open-ended investment companies (OEICs).
- Mutual funds
- Irish investment companies
- Retirement benefit plans
It is important to note that a parent entity whose primary reason for existence is to hold investments in other group entities is not considered to be a financial institution.
Advantages accruing from reduced disclosure framework can be availed by financial institutions if they meet the laid down rules and criteria. However, they will not be immune to:
International Financial Reporting Standards 7, ‘financial instruments: Disclosures’,
The disclosures in International Accounting Standards (IAS 1,) which pertains to disclosure of financial statements related to capital management.
The disclosures in IFRS 13, ‘Fair value measurement’ applicable to financial instruments.
Is it going to have any impact on dormant companies?
Dormant companies moving to new UK GAAP can avail of transition relief under FRS 102. As and when the dormant company decides to move to new UK GAAP, it can retain its accounting policies for reported assets and liabilities until and unless any new transaction is undertaken by the concerned entity.