The Financial Reporting Council (FRC) has published the new edition of the UK GAAP regulations, which first came into effect on January 1, 2015. These regulations have fundamentally changed how financial reporting is done in the United Kingdom and Ireland.
The FRC took this step to ensure that all users of financial statements receive clear, high-quality financial reporting that is consistent with the organisation’s size and complexity.
An overview of the new UK GAAP
The FRC scrapped the mix of existing standards – including the FRSs, SSAPs and UITFs – and replaced them with five new Financial Reporting Standards (FRS). We refer to these new standards as the new UK GAAP. They include:
- FRS 100 Application of Financial Reporting Requirements
- FRS 101 Reduced Disclosure Framework
- FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland
- FRS 103 Insurance Contracts
- FRS 104 Interim Financial Reporting
FRS 102 is the backbone of these new standards. It is based on the IASBs International Financial Reporting Standard (IFRS) for SMEs.
Curious about what this means for accounting practices in the UK and Ireland? Here are the key differences between the new UK GAAP and IFRS across different policy sectors:
The old regulations define intangible assets as fixed, non-financial assets that are transferable and controlled by a business either through custody or legal rights. It goes on to state that such assets must meet two criteria:
- Future economic benefits from the asset will flow through the entity
- You can measure the cost of the asset reliably
However, the new GAAP expands this definition considerably. Here’s how FRS 102 affects different categories of intangible assets:
FRS 102 allows businesses to recognise intangible assets emerging from development if they meet certain criteria. The company must demonstrate that:
- It plans to use or sell the asset
- It can use or sell the asset
- The intangible asset will generate future economic benefits
- Adequate resources are available to complete, use or sell the asset
- It can measure the development expense reliably
However, development costs must be expensed as incurred if the business doesn’t meet these criteria.
IFRS allowed companies to determine whether an intangible asset’s useful life is finite or infinite. However, the new UK GAAP establishes that these assets have a finite useful life. If the entity fails to give a reliable estimate of the useful life, then life cannot exceed 10 years.
The new GAAP recognises any goodwill that results from a business combination as an intangible asset. It is measured at cost, minus any accumulated amortisation and impairment losses.
Furthermore, UK GAAP considers the useful life of goodwill as finite and companies must estimate the length of goodwill. But, if reliable estimates aren’t possible, this period cannot exceed 10 years. When following IFRS, the business must impair goodwill as IFRS considers it to have an infintie useful life.
Property, plant and equipment (leases)
FRS 102 divides leases into two categories: finance and operating leases. A financial lease requires that all the risks and rewards of ownership are transferred to the lessee. But if these risks and rewards remain with the lessor, then it is an operating lease.
In financial leases, the lessee is required to recognise the underlying asset and liability from future lease payments in their statement of financial position. You should note that these amounts must be equal to the fair value of the underlying asset. But if it is lower, then you can use the present value of the minimum lease payments. This value is determined at the start of the lease.
On the other hand, operating leases do not affect your statement of financial position. FRS 102 specifies that these lease payments should be expensed over the term of the lease. This can be done on a straight-line – or other appropriate – basis.
IFRS doesn’t make a distinction between finance and operating leases. Instead, lessees are required to follow a uniform accounting model. You also have the option to disregard general requirements for short-term leases.
This exemption also applies to low-value assets such as computers, mobile phones and tablets. In these cases, you can recognise it as an expense on your statement of profit or loss using a straight-line or another appropriate basis.
According to FRS 102, you can measure investment property initially at cost. Initial cost includes directly attributable expenses such as legal fees, brokerage fees or property transfer taxes. For subsequent estimates, you should use the fair value method. Any changes in fair value count as profit or loss.
In IFRS, you can either measure such property initially at cost or through subsequent measurements. However, it lets you choose between fair value method recognized through the profit or loss statement and the cost method.
FRS 102 classifies cash, certain debt instruments and investments in non-derivatives as basic financial instruments. You can measure these initially at the transaction price and adjust for transaction costs. For subsequent measurement, you can use the effective interest method.
FRS 102, Section 12 covers more complex financial instruments. These include derivatives, asset-back-securities or hedging instruments. They are measured at fair value through profit or loss.
Conversely, IAS 39 specifies four categories of financial assets and two of financial liabilities. Each category has its own rules for recognition and measurement based on the business model and contractual cash flows.
The standards use vastly different impairment models too. FRS 102 follows the incurred loss model while IFRS 9 introduces the expected loss model. IFRS 9 also maintains the accounting rules for hedges. But, it provides new criteria for hedge accounting that are more aligned with the way entities manage their risks.
The new GAAP notes that you should recognise deferred taxes in respect to all timing differences at the reporting date. Examples for common timing differences include capital allowances which differ from depreciation expenses for the period of the financial statement. These are only tax-deductible when you incur any related expenditure.
However, IAS 12 uses the temporary concept – based on the statement of financial position – to recognise deferred taxes. Deferred tax assets and liabilities take all temporary differences into account, with some exceptions such as goodwill.
- FRS 102 specifies that revenue can come from:
- Goods sold
- Services rendered
- Construction contracts
- Others' use of a company’s assets (such as interest, royalties or dividends)
However, its scope explicitly excludes revenue from leases. The standard requires you to measure a company’s revenue at the fair value of the consideration received or receivable. FRS 102 is based on a risks-and-reward approach.
IFRS follows a different approach. It generally recognises revenue when an entity transfers control of an asset to a customer. It is based on a control approach.
The new GAAP lets companies choose between:
Capitalising on borrowing costs that are directly related to acquiring, constructing, or producing a qualifying asset as part of its cost; or,
Recognising borrowing costs as an expense in the statement of profit or loss for the relevant period Conversely, IFRS requires you to capitalise on borrowing costs for a qualifying asset.
Learn more about the UK GAAP and IFRS
This breakdown is a summary of the new whitepaper from LucaNet. If you’re interested in going more in-depth into the key differences between the UK GAAP and IFRS, click below to download the paper.
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