There are strict accounting standards used internationally to ensure that financial statements follow the same rules. This makes it easier for investors, government tax bodies and business owners alike to interpret documents for analysis. One set of standards used widely within the UK is the GAAP, or generally accepted accounting practice.
What is GAAP?
Financial reporting, like many business practices, brings with it different standards depending on location. For example, within the United States, businesses must follow a set of rules outlining corporate accounting principles, also called the GAAP. What is GAAP in this context? These are laid out by the Financial Accounting Standards Board (FASB) and the GAAP meaning is generally accepted accounting ‘principles’ rather than practice.
Most UK companies will need to follow the UK GAAP instead. This serves as a regulatory body for UK businesses, providing guidelines to use when preparing financial reports and accounts. Businesses are required to produce a balance sheet as well as a profit & loss statement, filing these with HMRC and Companies House. The GAAP helps dictate the standard that financial documents like these should be held to for consistency.
What is New UK GAAP?
These standards have changed over time to reflect the most current accounting needs. The Financial Reporting Council (FRC) published a set of reporting standards in 2015 called the New UK GAAP, which have been applicable since the beginning of 2016.
So, how does the New UK GAAP differ from the original GAAP meaning and standards? Here are a few ways:
It requires that all intangible assets be amortised, assuming that they have a finite lifespan.
It creates new rules for certain assets like government grants, biological assets and other sources of income.
It opens up the doors for a wider range of organisations to use UK GAAP, including micro-businesses and SMEs.
It expands the definition of what qualifies as a financial institution.
New UK GAAP for micro-entities
One of the defining features of the New UK GAAP is its accounting standard for small businesses, or ‘micro-entities’. Does your business qualify as a micro-entity? Here are the standards:
You have a maximum of 10 employees
The balance sheet total is capped at £316,000
The annual turnover is less than £632,000
With the rule changes in 2016, some partnerships were added to the list of micro-entities, but charities cannot apply. While it’s completely optional to follow the micro-entities standard, there are a few benefits to doing so if you’re eligible.
Reporting requirements for the balance sheet and profit & loss account are streamlined
You only need to file a balance sheet with Companies House
There is no need to create a director’s report
Minimum accounting items applies, with less information required on accounts
For small-sized businesses, this cuts down on time and paperwork under the New UK GAAP.
UK GAAP vs. IFRS
What’s important to note is that not all UK companies are required to use the UK GAAP regulations. If your company is listed on a stock exchange, it must follow International Financial Reporting Standards (IFRS) according to EU law. Non-listed companies can choose between UK GAAP vs. IFRS. Of course, with shifting regulations due to Brexit this could change in the future.
The IFRS was developed by the International Accounting Standards Board (IASB) in 2002, replacing the older IAS standards. Because cross-border transactions are so frequent in today’s economy, if your business operations involve a high level of international investment the IFRS might be better suited.
In reality, there are few differences between the two sets of standards. While the US GAAP is based on a set of principles, both the UK GAAP and IFRS offer a set of rules-based guidance. One notable difference between UK GAAP vs. IFRS is that the cash flow statement is a requirement for companies under IFRS, while in the UK GAAP smaller businesses are exempt.
The bottom line
As you start to sift through all the requirements of UK GAAP, keep in mind that these standards are used to provide useful information to investors and creditors. The guidelines help you provide all relevant details regarding your business’s financial health in a clear, logical way to the appropriate parties.
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