Financial Reporting

UK GAAP v IFRS

Students studying for professional examinations which offer a choice of UK or International Standards for financial reporting papers often ask what the differences are between financial reporting under UK GAAP and IFRS. This article looks at some of the most fundamental differences between UK Financial Reporting Standards (FRS) and the International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS). My initial answer to this (frequently asked) question is not a lot. The reason is that financial reporting under UK GAAP has more or less followed that of IFRS as it has always been the intention that the UK will report fully under IFRS eventually. Currently in the United Kingdom we have quoted PLCs and AIM listed entities reporting under IFRS in the UK. The jury is out at the moment finalising the way forward for the rest of the UK (the SME sector) to follow suit. When I say there is not a lot of difference, there actually is not. However, there are some (what I consider) quite notable differences between UK GAAP and IFRS, which I shall outline as follows: St ock v a l ua t i on Under SSAP 9 Stocks and long-term contracts a company can adopt the last-in first-out method of stock valuation (often referred to as the LIFO method). However, under the provisions of IAS 2 Inventories this method of stock valuation is not permitted. I nt a ngi bl e a sset s a mor t i sa t i on v s. i mpa i r ment In UK GAAP, FRS 10 Goodwill and intangibles allows an entity to amortise goodwill over its expected useful life if that expected useful life is less than twenty years. There is a rebuttable presumption whereby an entity may consider the life of the goodwill to be more than twenty years. However, where an entity states that goodwill is deemed longer than twenty years, the directors have to undertake an impairment review at the end of the first full financial year following the initial recognition of the goodwill or intangible asset and in other periods, where events or changes in circumstances indicate that its carrying value may not be recoverable in full. Under the provisions of IAS 38 Intangible assets amortisation is prohibited and the directors must undertake an impairment review on an annual basis. This links into IAS 36 Impairment of assets. C a sh f l ow st a t ement s Under FRS 1 Cash flow statements cash flows of an entity prepared under UK GAAP are prepared under eight headings operating activities, returns on investments and servicing of finance etc. IAS 7 Cash flow statements require cash flows to be reported under three headings: operating activities, investing activities and financing activities. Another notable feature under IAS 7 is that the reconciliation of movements in cash flows to movements in net debt is not required. The cash flow statement under IFRS is a mandatory primary financial statement, whereas in UK GAAP most small companies are exempt under FRS 1 from the requirement to prepare a cash flow statement. O per a t i ng pr of i t Under FRS 3 Reporting financial performance the FRS requires an entity to report operating profit. Under IAS 1, Presentation of financial statements this is not required, though an entity may choose to do so. C ha nges i n a ccount i ng pol i cy Under IAS 8 Accounting policies, changes in accounting estimates and errors a company can only change its accounting policies if it results in the financial statements giving more relevant and reliable information. Under FRS 18 Accounting policies management must review their accounting policies to ensure they remain the most appropriate to its particular circumstances for the purposes of giving a tr ue and fair view. Note the differences between the IFRS objective of relevant and reliable and UK GAAP true and fair. C onst r uct i on cont r a ct s Under IAS 11 Construction contracts an entity can apply the percentage of completion method if the outcome of the contract can be reliably estimated. Under the provisions of SSAP 9 Stocks and long-term contracts this task force abstract takes a more prudent approach

and recognises prudently calculated profit only if the outcome of the contract can be reliably estimated. However, both IAS 11 and SSAP 9 take the same stance that where a contract is loss-making, losses are recognised in the statement of comprehensive income (income statement)/profit and loss account as soon as they arise. Def er r ed t a x Under the provisions of FRS 19 Deferred taxation a company can choose to discount its deferred tax to present day values though it has to be said that this is rarely done in practice. Under the provisions of IAS 12 Income taxes a company cannot discount its deferred tax to present day values. Another notable difference in deferred tax is that FRS 19 recognises deferred tax as timing differences. Under IAS 12, defer red tax is recognised on the basis of taxable temporary differences. Fi xed a sset s (Non- cur r ent a sset s) Under IAS 16 Property plant and equipment, assets held for sale, biological assets related to agricultural activity and exploration and evaluation assets are specifically excluded from IAS 16. They are, instead, covered under IFRS 5 Non-current assets held for sale and discontinued operations, IAS 41 Agriculture and IFRS 6 Exploration for and evaluation of mineral resources respectively. Such assets identified above which are not covered by IAS 16 do, however, fall under the scope in UK GAAP of FRS 15 Tangible fixed assets. It is to be noted that investment properties are excluded specifically from both standards (IAS 16 and FRS 15), being dealt with under the provisions of IAS 40 Investment properties and SSAP 19 Accounting for investment properties respectively. Rel a t ed pa r t y t r a nsa ct i ons Under IAS 24 Related party disclosures there is no exemption to report related parties if this conflicts with the entitys duties of confidentiality. There is an exemption under FRS 8 where such disclosure would conflict with the reporting entitys duties of confidentiality arising by operation of law. C onsol i da t i on Under FRS 2 Accounting for subsidiary undertakings, a parent does not consolidate where there are severe long-term restrictions over the assets or management of the subsidiary undertaking. IAS 27 Consolidated and separate financial statements does not have such exclusion. I nv est ment pr oper t i es Under IAS 40 Investment properties, an entity can choose between the fair value model and depreciated cost model for valuation of its investment properties. SSAP 19 Investment propertiesdoes not allow the depreciated cost model for such properties. A gr i cul t ur e This follows on from the issues touched on in Fixed Assets (Non-current assets) above. There is no UK equivalent standard for agriculture but there is under IFRS by virtue of IAS 41 Agriculture. Fi xed a sset s (non cur r ent a sset s) hel d f or sa l e Again, there is no specific standard which deals with assets held for sale or discontinued operations. In UK GAAP, these are dealt with under FRS 3 Reporting financial performance. However, the international regime deals with these under separate accounting standard, IFRS 5 Non-current assets held for sale and discontinued operations. Empl oy ee benef i t s Actuarial gains and losses are recognised in the Statement of Recognised Gains and Losses (STRGL) in the UK under FRS 17 Retirement benefits. IAS 19 Employee benefits offers a choice. These can either be recognised in the statement of comprehensive income (income statement); usually over a period representing the average working lives of the employees participating in the defined benefit scheme. Alternatively, an entity can recognise actuarial gains and losses in full as and when they arise, outside profit or loss, in a Statement of Recognised Income and Expenses (SoCIE). This is very similar to the provisions of FRS 17 Retirement benefits mentioned above. C oncl usi on So when I said earlier that there are not a lot of differences between UK GAAP and IFRS, there are some notable differences which are identified above. There are some other differences, but those are the main differences. However, in the main the gap between UK GAAP and IFRS is quite small. St ev e C ol l i ngs FM A A T A C C A Di pI FRS i s A udi t M a na ger a t Lea v i t t W a l msl ey A ssoci a t es Lt d (ht t p://w w w .l w a l t d.com) a nd a pa r t ner i n A ccount a ncy st udent s.co.uk C opy r i ght of t hi s a r t i cl e r ema i ns w i t h A ccount a ncy St udent s.co.uk .