In accountancy, standards are used to ensure consistency throughout the industry. They also exist to promote transparency and to ensure the information provided is consistent, relevant, and useable – saving time and resource for the provider as well as the party under scrutiny. Accounting standards are critical so that companies working in tax and accountancy can deliver clear, coherent details to both their clients and the authorities.
When these accounting standards are applied, independent observers can gather and review the information they are seeking with full clarity and make informed decisions about their business.
In the UK, this is enforced by following a system of Generally Accepted Accounting Principles (GAAP), which involves a series of measures that preserve transparency and encourage consistency.
They bring benefit to shareholders and investors by keeping them up to date with how a business is performing.
GAAP is generally used by listed companies, while non-listed firms normally use the International Finance Reporting Standards (IFRS) to ensure compliance and optimise their approach.
What are the GAAP standards?
When it comes to businesses operating in the UK, there are distinct “UK GAAP” rules that apply – with the financial reporting framework updating in 2015.
Previously, the six basic standards of GAAP in the UK were FRS 100–105, with two further standards known as Statements of Recommend Practice (SORPS) and Financial Reporting Standard for Smaller Entities (FRSSE) for companies operating in certain industries.
The new approach has created three new standards – FRS 100, 101, and 102 – to refine and replace the previous ones.
While these changes will affect your working practice in different ways, the two key changes include:
- Streamlining What Exists: The previous combination of approaches of FRS, SSAP, and UITF have been folded into a single standard; FRS 102.
- Adding New Frameworks: A new disclosure framework has been introduced for parent entities or subsidies of groups that provide publicly viewable, consolidated statements.
Blanket Change: The vast majority of medium and large-sized businesses will see these standards applied throughout their financial statements. This includes those that are formally classed as public benefit entities, those that handle retirement benefit plans, and other institutions explicitly involved with finance.
SORP Changes: These have been completely withdrawn and added under the banner of the new standards
Reduced Disclosure: The process allows for reduced disclosure requirements for parent and subsidiary companies.
When these standards are met, the reporting of financial information remains consistent, allowing bodies that review financial statements to enjoy detailed, digestible financial reporting that is timely and accurate.
What the new iteration of GAAP UK allows is that documentation remains proportionate to the nature of the entity – allowing even the largest and most complex of institutions to be compared fairly and effectively.
Breaking this down further, the current FRS protocols are as follows:
FRS 100: The Application of Financial Reporting Requirements
FRS 101: The Reduced Disclosure Framework
FRS 102: The Financial Reporting Standard Applicable in the UK and ROI
FRS 103: Insurance Contracts
These were followed by two further standards…
FRS 104: Interim Financial Reporting
FRS 105: The Financial Reporting Standard Applicable to Micro-Entities
At this juncture, only the FRSSE regulations remain from the original set of GAAP regulations.
How do these accounting standards help?
Following these regulations allows businesses to take advantage of several concrete benefits.
The most important of these include:
Informed decision making
Accounting standards play a crucial role in the regular production of annual financial statements, ensuring that materials are fit-for-purpose and robust.
The production of annual statements specifically helps protect creditors and shareholders while ensuring businesses are best placed to make key decisions on their tax structure.
Using GAAP practice, these statements show whether businesses are able to meet their financial obligations and how profitable they truly are.
A readable, accurate balance sheet shows how healthy a company’s finances are at any point in time and are commonly used for planning purposes and the allocation of resources.
Breaking this down further, income over a business year determines how much a company pays as well as its profits and unique dividends.
International Business Trading
When companies frequently trade with overseas counterparts, they were formally required to use international accounting standards.
The recent changes to GAAP procedure allow UK standards to be more closely aligned to European ones.
While there is still a degree of discrepancy, this allows businesses to be more efficient and save time and resource – especially when dealing with stock-listed companies and EU-listed companies who also must abide by essential reporting rules.
This can help streamline communication and provide a clear and present view of the potential risks and rewards of engaging with an entity – letting you get the full picture when it matters most.
Protecting the reputation of businesses
Firstly, reputational management is vitally important when undertaking business domestically or with an international remit.
Applying sound accounting standards allows you to not only ensure consistency, but permit fair estimates and valuations to be delivered.
This allows for accurate reporting and prevents unfair manipulation from occurring.
If companies fail to comply with set standards, their reputation can be harmed, resulting in negative ramifications that can derail long-term planning and practice.
And should a formal audit fail, they can receive substantial penalties.
Need more advice about accounting standards?
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