A new era of financial reporting in the UK has begun. In a move to bring the UK closer to an IFRS based model, in March the UK Financial Reporting Council has published FRS 102 the Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland. FRS 102 is based on the IFRS for SMEs developed by the International Accounting Standards Board (IASB), the standard-setter responsible for the development and publication of IFRS. It will apply primarily to medium and large non-listed companies, non-profit and other entities that are currently required to apply the full UK GAAP accounting standards. Small companies and other entities that currently apply the Financial Reporting Standard for Smaller Entities (FRSSE) are unaffected by these changes and will continue to apply the FRSSE in preparing their financial reports.

Since 2005, while UK-listed companies have been following the IFRS framework in preparing their financial statements, other non-listed companies have continued to prepare financial statements based on a framework composed of locally developed standards, a hotch-potch collection that was first developed over three decades ago and added to and amended as the need arose. Although the more recent additions to this collection of UK GAAP standards have been based on equivalent IFRS standards, a comprehensive review and overhaul of the entire framework has been long overdue.

Accountants and auditors who may be more familiar with the current UK GAAP framework will have to familiarise themselves with the nuances of financial reporting derived from a different framework. Many affected companies will be rightly concerned about the additional costs they face during the transition. However the need for consistent, comparable and transparent financial information is paramount for businesses to survive and succeed, particularly in an increasingly global marketplace. The benefits of adopting an internationally recognised financial reporting framework will far outweigh the costs. Better benchmarking and comparability is likely to enable UK companies to access capital in a more cost-effective manner. With the UK recording exports of £487bn ($746bn) and imports of £524bn in 2012, a further increase in cross-jurisdictional trade is another benefit that is likely to flow from the introduction of globally understood financial reporting for the larger non-listed UK companies.

The core of the new reporting framework, FRS 102, is based on the IFRS for Small and Medium Entities (IFRS for SMEs). However, vestiges of the existing GAAP framework that are still necessary in a UK financial reporting context are rightly retained. For example, the presentation requirements for the Statement of Financial Position and Income Statement reflect Companies Act requirements.

Other nuances such as the reporting needs of non-profit entities are also catered for. Financial reports to the year ended 31 December 2015 are the first to be affected by the new reporting framework (early application is permitted), and preparers do need to start planning immediately to meet this deadline. Other considerations such as the impact on tax and dividends will also have to be taken into account.

Coming in at just under 350 pages, FRS 102 represents a dramatic and welcome simplification of the 3,500 plus pages of the current set of UK GAAP accounting standards that it replaces. However, I would note this simplification comes at a price. There will be times when preparers may still have to refer to full IFRS standards, when the new standard does not address a particular issue. Another challenge is to ensure FRS 102 sufficiently reflects any changes made in the full IFRS standards. In the past, this has been an issue with the IFRS for SMEs.

The FRC will have to be mindful of these considerations in ensuring the new UK reporting framework remains up to date and relevant in a global context. In the future, should the UK FRC become aware of reporting issues affecting entities that fall within the scope of FRS 102, it should work with the IASB in seeking a global solution, rather than updating the new UK reporting framework. Adopting this approach will minimise the risk of diverging away from an IFRS based framework.

Alex’s previous blog post
Mapping the audit