Which accounting standard should you use?
When preparing a set of financial statements in the UK there is a choice of accounting standard to apply in order to comply with UK Companies Act 2006. Broadly the choice is between UK GAAP accounting standards and International Accounting standards (IFRS). UK GAAP is broken down into FRS 102, FRS 102 section 1A, FRS 105, and FRS 101. Here we will just be discussing the major differences between FRS 102 and IFRS and why you might choose one over the other, but you can find more details on the UK GAAP choices here.
Is there a requirement to use either UK GAAP or IFRS?
The first point to establish is whether there is a requirement to use either UK GAAP or IFRS – if a company is part of a larger group, the group may mandate use of one or the other (most likely to be IFRS if an international group or listed) and therefore you may want to consider whether FRS 101 can apply.
Is there a commercial reason to use one over the other?
Another consideration before looking at numerical differences is whether there is a commercial reason to use one over the other. For example; for a company looking to list, or one going up against larger companies when tendering for work may want the financials to be more comparable and therefore match the IFRS financial statements that another competitor may be using.
One of the noticeable differences between IFRS and FRS 102 is the number of pages in the financial statements. Full IFRS financial statements require significantly more disclosure than FRS 102 and therefore the financial statements will be longer. This isn’t necessarily an issue, but the compliance cost and time will increase when preparing financial statements under IFRS over FRS 102. There will also be more disclosure on the public record at Companies House which may put some off.
What are the key differences between IFRS and UK GAAP?
- Under FRS 102, operating leases are recognised straight line through the profit and loss – effectively rent is recognised each year and the asset is not recognised by the company.
- Under IFRS, almost all leases are recognised “on balance sheet” meaning that the asset is capitalised and depreciated over its useful economic life. The amount that it is capitalised and the corresponding lease liability is a complex calculation involving present value calculations, and in subsequent years interest is recognised to increase the liability.
- Sales are recognised under a 5 step model under IFRS which is not used in FRS 102. Without looking at the specific contracts in place for a company it is not possible to suggest whether revenue would be recognised differently under IFRS than UK GAAP, but there are many companies that have resulted in very different revenue recognition by using IFRS.
- FRS 102 has two types of financial instrument – basic and other. IFRS uses an “expected loss” model when valuing financial instruments rather than an “incurred loss” model.
Property, plant and equipment
- IFRS mandates that any borrowing costs incurred while assets are being constructed must be capitalised, where as FRS 102 gives a choice.
Intangible assets – business combinations
- When completing a business combination under FRS 102 transaction costs are included in the cost of the acquisition, where under IFRS these are specifically excluded.
- There are some differences with contingent consideration and step acquisitions.
- Intangible assets acquired as part of a business combination are required to be separately recognised under IFRS where there is a choice under FRS 102.
- Positive goodwill is not amortised under IFRS, but instead is tested annually for impairment. A gain on bargain purchase is immediately taken to profit or loss. Under FRS 102 both positive and negative goodwill are capitalised and amortised over their useful life.
Intangible assets – development costs
- Under IFRS if any development costs meet the recognition criteria they must be capitalised, whereas under FRS 102 this is a choice once the criteria are met.
Deferred tax – temporary not timing
- Under FRS 102 deferred tax is based on timing differences, but under IFRS it is based on temporary differences.
Consider how you might be affected
Please note this is not an exhaustive list of differences between FRS 102 and IFRS, but outline some of the larger areas where differences occur. There are a number of other areas with differences that may need to be considered for your business.
Rarely should an accounting treatment be the only driver for choice of accounting convention to use, as there will be other factors that a company will be considering when making a decision. However the accounting treatments in some areas can result in very different accounting, so it is worth considering how you might be affected when moving from one to the other.
If you would like to speak to someone about the above please contact us.
N.B. This doesn’t cover transition between UK GAAP and IFRS and the complications that apply on transition.