FRC Accounting: The UK’s Key Standards and Rules

The Financial Reporting Council (FRC) is the United Kingdom’s independent regulator tasked with promoting high standards of corporate governance and reporting. Its mission is to foster transparency and integrity in business, which supports investment and the nation’s economic growth. The FRC establishes the UK’s codes and standards for corporate governance, accounting, and auditing. It also oversees the regulatory activities of the professional bodies for accountants and actuaries, holding them accountable for high-quality work.

Core Functions of the Financial Reporting Council

A primary function of the FRC is setting the country’s accounting standards. The council is responsible for issuing and maintaining the United Kingdom’s Generally Accepted Accounting Practice (UK GAAP). This framework guides the preparation of financial statements for UK-based entities, ensuring a consistent basis for financial reporting.

Another area of responsibility is establishing standards for auditing and professional ethics. The FRC sets the technical and ethical standards that auditors must follow, covering procedures for conducting an audit and the principles of independence. It also issues standards for quality control within audit firms to ensure audits are performed to a consistently high standard.

The FRC also champions high-quality corporate governance by developing and maintaining the UK Corporate Governance and Stewardship Codes. These codes provide a blueprint for effective board leadership, accountability, and engagement with investors. The principles guide how companies should be directed to achieve long-term success.

Finally, the FRC has an oversight role, monitoring the compliance of companies and audit firms with its standards. It regulates auditors, accountants, and actuaries, and has the authority to investigate potential misconduct. This oversight extends to reviewing company reports and accounts to check for compliance with legal and accounting rules.

Key Principles of UK GAAP and FRS 102

The primary standard within UK GAAP is FRS 102, “The Financial Reporting Standard applicable in the UK and Republic of Ireland.” Introduced in 2015, it was designed to align the UK’s accounting rules for non-listed companies more closely with International Financial Reporting Standards (IFRS), while remaining less complex. FRS 102 is mandatory for most UK entities not required to use IFRS and provides a framework for preparing financial statements intended to give a “true and fair view.”

The standard is scalable, with different requirements based on an entity’s size. Section 1A of FRS 102 sets out reduced presentation and disclosure requirements for companies that meet the small companies regime thresholds. While these small entities must follow the same recognition and measurement rules, Section 1A allows them to prepare more concise financial statements.

Several concepts form the bedrock of FRS 102. Financial statements are prepared on the accrual basis, meaning transactions are recognized when they occur, not when cash is exchanged. The going concern principle assumes the entity will continue to operate for the foreseeable future. FRS 102 also requires financial information to be understandable, relevant, reliable, and comparable.

FRS 102 provides specific guidance on numerous accounting areas. For Property, Plant, and Equipment (PPE), entities can choose between the cost model or the revaluation model. Intangible assets, including goodwill from a business combination, must be amortized over their estimated useful life, as FRS 102 does not permit indefinite useful lives.

The standard also dictates how financial instruments are treated, distinguishing between ‘basic’ and more complex instruments. Recent amendments have moved revenue recognition under FRS 102 closer to the five-step model found in IFRS 15. These rules provide a detailed roadmap for companies to ensure their financial reporting is robust and compliant.

The UK Corporate Governance Code

The FRC’s UK Corporate Governance Code applies to companies with a premium listing on the London Stock Exchange. The Code operates on a “comply or explain” basis. This principle provides companies with flexibility, allowing them to depart from the Code’s provisions if they offer a clear and well-justified explanation in their annual report. This approach encourages thoughtful application of governance principles.

The Code is structured around several principles that guide board conduct and company oversight:

• Board Leadership and Company Purpose: The board is responsible for setting the company’s strategic objectives and ensuring that its values and culture are aligned to deliver long-term sustainable success. The 2024 update to the Code requires governance reporting to focus on the outcomes of board decisions.
• Division of Responsibilities: This calls for a clear separation between the leadership of the board and the executive leadership of the company’s business, typically achieved by separating the roles of the Chair and the Chief Executive Officer.
• Composition, Succession, and Evaluation: Boards should be diverse and possess an appropriate balance of skills, experience, and independence. The Code stresses the importance of having independent non-executive directors who can provide constructive challenges.
• Audit, Risk, and Internal Control: Boards must establish a formal and transparent policy on audit and maintain a sound system of risk management and internal controls. A provision effective from 2026 will require boards to make an annual declaration on the effectiveness of their material internal controls.
• Remuneration: This principle guides boards to design executive pay policies that are aligned with the company’s long-term strategy and success.

Supervision and Enforcement Activities

The FRC monitors adherence to its standards through two primary review functions. The Corporate Reporting Review (CRR) team examines the annual and interim reports of companies to ensure they comply with the Companies Act and relevant accounting standards like FRS 102. This team selects companies for review based on risk assessment and rotation.

The Audit Quality Review (AQR) team inspects the quality of audits performed by UK firms that audit Public Interest Entities (PIEs). AQR inspections assess whether audits are conducted to a high standard and comply with auditing regulations. The largest audit firms are reviewed annually, and findings are used to promote improvements.

When the FRC identifies non-compliance or misconduct, it can launch investigations into statutory auditors, accountants, and actuaries. These investigations are typically reserved for cases where there is a significant public interest concern. If an investigation finds breaches, the FRC can impose sanctions such as financial penalties, public reprimands, and orders for corrective action.

The UK government has intended to transition the FRC into a new, more powerful regulator called the Audit, Reporting and Governance Authority (ARGA). However, the necessary legislation has been delayed, and the timeline for establishing ARGA remains uncertain. This proposed body is expected to have enhanced enforcement powers, including the ability to directly investigate and sanction company directors for failures in their financial reporting duties.