Financial reporting can get confusing when businesses and other organisations find they need to comply with different regulations. In recent years, efforts have been made to standardise the accounting requirements for businesses across borders, including between EU and UK countries. But key differences remain.
For many reasons, the UK has its own standards for businesses registered in the country, which companies must comply with. This article dives into what’s in UK GAAP, and how businesses are best placed to follow these guidelines.
What is UK GAAP?
The Generally Accepted Accounting Practice (GAAP) is a reporting framework based on key principles, originally established in the United States in 1933. GAAP guides professionals in preparing financial documents according to regulatory standards.
However, since different countries have different reporting standards, the UK has its own version, ‘UK GAAP’, which is outlined by the Financial Reporting Council (FRC). UK GAAP is comprised of:
- Financial Reporting Standards (FRS): these are the requirements for businesses preparing financial statements, such as FRS 101 and FRS 102.
- Statements of Recommended Practice (SORP): SORPs offer guidance on accounting practices across industry sectors, supporting Financial Reporting Standards (FRS).
- Other guidance: i.e. publications from the FRC and other relevant bodies.
The FRC oversees accounting standards for UK businesses and enforces proper financial reporting. One such rule is that all UK businesses need to prepare a balance sheet, profit and loss statement, and supporting notes about their accounts (these mandatory documents are known as ‘statutory accounts’).
The 8 UK GAAP accounting principles
When gathering information and preparing statements, all businesses must follow the 8 principles of UK GAAP, which are fundamental to accurate reporting.
- Economic Entity Assumption: accounts should demonstrate clear differences between the transactions carried out by the business and the business owner
- Monetary Unit Assumption: all records should be recorded in a financial currency, typically the same as the accounts have been prepared with
- Time Period Assumption: businesses should report all financial statements within a specific time period (accounting year)
- Cost Principles: all assets should be initially recorded at their cost
- Full Disclosure Principle: business or entity should disclose all relevant and necessary information to give full transparency to stakeholders and investors
- Going Concern Principle: the assumption that a company will complete plans during and beyond the next financial year, using its assets to meet its financial obligations
- Matching Principle: expenses should be recognised in the same accounting period as their related revenues
- Revenue Recognition Principle: GAAP revenue recognition refers to the principle that all revenue should be recognised in the period that they were earned, and not when cash was received
The Companies Act 2006
To enforce proper accounting practices, the Companies Act 2006 made a legally binding demand on UK businesses to file financial statements according to accounting standards set by the UK (GAAP) or the International Financial Reporting Standards (IFRS).
The 2006 Act also requires limited companies to file their financial documents and accounts with the Registrar of Companies, who then make them available to the public.
What is the objective of GAAP?
So, what do UK GAAP standards try to achieve?
Put simply, the objective of GAAP is to make sure all financial statements are doing their job correctly. These accounting principles ensure that businesses provide investors and creditors with relevant information, and paint a clear and accurate picture of an entity’s financial position.
For professionals, UK GAAP also aims to make it easier to carry out annual financial reporting. Like other standards, they give insights into business performance over a certain time period, and make sure this information is obtained in a fair and effective way for all businesses across various industries.
Does the UK use GAAP or IFRS?
UK businesses tend to use the UK GAAP FRS 102 accounting standard for financial reporting because the rules are less complicated than the IFRS. This means accounting takes less time to process, and therefore saves labour costs.
GAAP in the UK has gradually moved closer to the principles of the IFRS, but not all companies need to follow UK GAAP. Unlisted companies in the UK can choose which standards they want to report under, while stock-exchange listed companies need to follow IFRS.
We talk in more detail about the differences between these standards in our article on GAAP vs IFRS.
Applying UK GAAP to business size
How UK GAAP is implemented changes based on the size and classification of an entity. A simplified version of UK GAAP, FRS 102, was designed for small and medium-sized enterprises (SMEs) to make compliance requirements simpler.
Larger, publicly-traded companies need to either comply with UK GAAP in full, or the IFRS. Since it has more international recognition, UK businesses classed as enterprises tend to adopt IFRS.
How to stay compliant with UK GAAP
Since every industry is run in a different way, each have a unique set of reporting requirements. However, staying compliant with UK GAAP requires every business to maintain records in a standardised way so as to give stakeholders full transparency into its financial health.
Here are the key ways companies can ensure they comply with UK GAAP:
- Assess which reporting standards apply to the business
- Once relevant standards are identified, examine their likely impact on your business
- Make sure all data and records are current and correct with regular system reviews and accounting policy checks
- Stay up to date with relevant report deadlines, as these can vary depending on requirements
How SaaS solutions support UK GAAP compliance
SaaS (Software-as-a-service) is a form of software distribution that lets users (e.g. businesses) access programs that are hosted remotely by third parties, who routinely perform upgrades and maintenance.
It’s become a popular solution for companies to adopt SaaS systems, which apply principles like UK GAAP for them and improve the quality of the business’s financial reporting. Reporting software can generate UK GAAP-compliant financial statements for the business, while also tracking non-GAAP metrics like liquidity, gross profit margins, interest coverage and others.
The benefits are not limited to larger businesses that have the biggest accounting obligations: SaaS accounting solutions record transactions for businesses of all sizes, helping them to prevent data errors from causing inefficiencies, and streamline reporting to make sure all deadlines are met in good time.
Workiva simplifies the manual preparation of documents for UK GAAP
Accurate financial reporting leaves little room for error, and companies understand the importance of making sure statements are consistent and keep up with standardised practices. Workiva’s financial reporting software gives businesses access to real-time financial data from anywhere with an internet connection, letting you manage your business on the go from multiple locations.
Our platform lets teams automatically standardise their reporting and data presentation, saving them countless hours in formatting information across multiple sources and materials. The platform’s linking functionality also automatically updates any changes across all reports for data consistency. This minimises the risk of errors and helps teams feel confident when they submit reports to external auditors.
With Workiva, all statutory reporting data is brought together in one place and fully reconciled in different companies’ accounting systems. This enables them to streamline reporting, supports collaboration during the preparation stages, and maintains consistency within a secure cloud platform.
Find out more about how Workiva enables full compliance and seamless, transparent reporting for accounting and finance teams.
