Last editedApr 20222 min read
Accounting standards are always going to sound daunting and confusing to anyone who isn’t an accountant. But it always pays to have at least a vague understanding of every financial aspect of your business, particularly if you hope to make the most informed decisions regarding spending and resource allocation.
The most important thing for all UK business owners to understand, however, is the difference between UK GAAP and IFRS standards.
The Companies Act
TheCompanies Act 2006 demands that all UK businesses prepare their financial statements to accounting standards set by the UK (GAAP) or the international accounting standards community. While there are many similarities between these two standards, there are also many important differences.
Generally speaking, most UK companies will use the UK GAAP FRS 102 accounting standard to prepare all financial statements. This is because the requirements are less complex and demanding than the international standards, so the accounts take less time to process and the overall cost is lower.
However, UK companies that are part of a wider international group might choose to apply IFRS standards so that everything is consistent across the board. In any case, whichever standard you choose is going to have a major impact on yourbalance sheet and tax position. So, making the right decision is paramount.
Below we’ll be exploring the important differences in detail to help you make an informed decision.
UK GAAP vs IFRS accounting standards
Under IFRS, all leases must be classed as assets and liabilities if the length of the lease is more than 12 months. Under FRS 102, however, a lease is classified as either a finance lease or an operating lease. The former is true if transfers substantially all the risks and rewards incidental to ownership and the latter is true if it does not.
The most important difference here is that, under IFRS, the life of an intangible asset is indefinite but under FRS 102, it should be no more than 10 years. Also, under FRS 102, as long as the capitalisation criteria is met, you’re allowed to recognise development costs in the profit or loss, or on a balance sheet. Under IFRS, meanwhile, alldevelopment costs must be capitalised as long as the criteria is met.
Under IFRS, goodwill is not amortised. However, it is subject to an annual impairment review. Under FRS 102, goodwill is amortised on a systematic basis throughout its expected life. If it can’t be measured reliably, that expectancy should be no more than 10 years.
Under FRS 102, users can decide to either capitalise or expense the borrowing costs related to acquiring or building property, whereas, under IFRS, the costs are always capitalised. When it comes to property investment, meanwhile, IFRS allows the business to choose between holding it at depreciated cost or fair value. FRS 102, meanwhile, dictates that all property investments must be measured at fair value.
The IFRS standard declares that all purchases that are incremental costs of obtaining a contract are classed as assets and amortised. The FRS 102 standard, meanwhile, declares that purchases are recognised according to the relatable period. So, for example, if commission was paid to an employee, this should be recognised during the month the commission was earned.
Under FRS 102, revenue is recognised only when costs can be reliably measured and it’s likely that the business will benefit economically. Under IFRS, meanwhile, revenue is recognised over time.
For small businesses, using the FRS 102 standard allows them to use thesmall companies’ regime, which lets them prepare accounts with certain reduced disclosures. Under IFRS, meanwhile, there are no exemptions for reduced disclosures.
We can help
If you’re interested in finding out more about UK GAAP FRS 102, IFRS, or any other aspect of your finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you withad hoc payments orrecurring payments.