What is UK GAAP? A Look at the Current Framework

UK Generally Accepted Accounting Practice, or UK GAAP, is the collection of accounting standards that companies in the United Kingdom follow when preparing their financial statements. This national framework is mandatory for many businesses unless they are required or choose to use International Financial Reporting Standards (IFRS). The Financial Reporting Council (FRC) oversees these standards to promote transparency in business reporting. The current system replaced an older, more complex set of standards to simplify the reporting process and align more closely with international practices.

The UK GAAP Framework

The modern UK GAAP framework is structured around a core set of standards issued by the FRC, each designed for different types of entities. This tiered system ensures that reporting requirements are proportionate to the size and complexity of the company. The structure is laid out and governed by an overarching standard that directs companies to the specific rules they must follow.

FRS 100 ‘Application of Financial Reporting Requirements’

FRS 100 serves as the gateway to the UK GAAP framework. It does not contain accounting rules but instead sets out the overall structure and scope of financial reporting in the UK. This standard directs entities to the appropriate accounting standard based on their size, type, and whether they are part of a group, creating a roadmap for compliance.

FRS 101 ‘Reduced Disclosure Framework’

FRS 101 offers a simplification for qualifying parent and subsidiary entities whose parent company already prepares publicly available consolidated financial statements under IFRS. These entities can apply the same recognition and measurement rules as full IFRS, which is beneficial for group consolidation purposes. The advantage of FRS 101 is that it permits reduced disclosures, removing the need to repeat notes already available in the parent’s consolidated accounts, such as a cash flow statement.

FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’

FRS 102 is the principal standard of the UK GAAP framework, and most UK entities that do not apply IFRS or other specialized standards will use it. It is a single, comprehensive standard derived from the IFRS for SMEs (Small and Medium-sized Entities). The FRC has modified it to suit the UK and Irish legal and economic environment, and its 35 sections cover nearly all aspects of accounting, providing a complete reporting system in one document.

FRS 105 ‘The Financial Reporting Standard applicable to the Micro-entities Regime’

For the smallest companies, FRS 105 provides the simplest reporting option available under UK GAAP. This standard is exclusively for “micro-entities,” which are defined by strict size criteria. FRS 105 is a stripped-down version of FRS 102, drastically reducing the information presented in financial statements. For example, micro-entities are not required to prepare a directors’ report or provide notes to the accounts beyond a few basic disclosures at the foot of the balance sheet.

Determining Which Standard Applies

Identifying the correct accounting standard under UK GAAP is linked to a company’s size and public interest status. The Companies Act 2006, alongside FRS 100, establishes a classification system that determines an entity’s reporting obligations. This tiered approach is designed to match the complexity of the accounting framework with the scale of the business.

An entity’s size is determined by meeting at least two of three criteria related to its annual turnover, balance sheet total, and the average number of employees. To be classified as “micro,” a company’s turnover must not exceed £1 million, its balance sheet total must be no more than £500,000, and it must have an average of 10 or fewer employees. Only these entities are eligible to apply FRS 105.

The next tier is for “small” companies, which have broader thresholds: a turnover of not more than £15 million, a balance sheet total of no more than £7.5 million, and an average of 50 or fewer employees. Small companies apply FRS 102 but can take advantage of Section 1A of that standard, which significantly reduces disclosure requirements while following the full recognition and measurement principles.

Companies that exceed the small company thresholds are classified as either medium-sized or large. A medium-sized entity has a turnover of no more than £54 million, a balance sheet total up to £27 million, and an average of 250 or fewer employees. Any company that surpasses these limits is considered large, and both must apply the full requirements of FRS 102.

Certain types of entities are excluded from the simplified regimes, regardless of their size. Public companies listed on a stock exchange, as well as many financial institutions or insurance companies, cannot be classified as small or micro. These entities have a higher level of public accountability and are subject to more stringent reporting requirements, often mandating the use of full IFRS.

Key Accounting Differences from IFRS

While UK GAAP is closer to international standards, several differences remain between FRS 102 and full IFRS. These divergences can impact a company’s reported financial position and performance.

• Goodwill: Under FRS 102, goodwill acquired in a business combination must be amortized over its useful life. If a reliable estimate of its useful life cannot be made, the standard imposes a maximum period, not exceeding ten years. In contrast, IFRS prohibits the amortization of goodwill and instead requires an annual impairment test to determine if its value has decreased.
• Intangible Assets: FRS 102 gives entities a choice regarding development costs; they can either capitalize them as an intangible asset or write them off as an expense as they are incurred. IFRS, on the other hand, mandates the capitalization of development costs once specific criteria demonstrating future economic benefit are met.
• Investment Property: The default treatment under FRS 102 requires all changes in the fair value of investment property to be recognized directly in the profit and loss account. IFRS allows entities to choose between a fair value model, similar to FRS 102, or a cost model, where the property is treated like other fixed assets and depreciated.
• Government Grants: FRS 102 permits entities to use either a “performance model” or an “accrual model.” The performance model often allows for the grant to be recognized as income sooner if no future performance-related conditions are attached. IFRS requires grants to be recognized systematically over the periods in which the entity recognizes the related costs.
• Revaluation of Property, Plant, and Equipment: FRS 102 allows an entity to revalue a single asset within a class of assets without being required to revalue the entire class. IFRS is stricter; if an entity chooses to revalue an item, it must revalue the entire class of assets to which that asset belongs.

Adopting UK GAAP for the First Time

Transitioning to a UK GAAP standard like FRS 102 is a structured process governed by Section 35 of the standard. The principle of this transition is full retrospective application, which means the company must restate its financial history as if it had always been applying FRS 102 to ensure comparability over time.

The starting point for the transition is the creation of an opening FRS 102 balance sheet at the “date of transition.” This date is the beginning of the earliest comparative period presented in the first set of FRS 102 financial statements. For a company preparing its first accounts for the year ending December 31, 2026, with one year of comparative data, the date of transition would be January 1, 2025.

In preparing this opening balance sheet, an entity must recognize all assets and liabilities required under FRS 102 and derecognize any items not permitted. It must also reclassify items into the appropriate categories and remeasure all recognized items using FRS 102 principles. The net effect of all these adjustments is recorded directly in retained earnings at the date of transition.

To ease the burden of this process, Section 35 provides a number of mandatory exceptions and optional exemptions from full retrospective application. For instance, a company is prohibited from retrospectively changing its accounting for estimates. Optional exemptions allow a company to, for example, use the fair value of an asset as its “deemed cost” at the transition date, avoiding the need to reconstruct its historical cost.