Compliance with Generally Accepted Accounting Principles (GAAP) slips under the radar of many business owners but is essential for attracting investors. It is therefore the responsibility of the CFO to ensure their business has the right policies and processes in place to ensure standards are met.
Senior managers should oversee the processes, and everyone within the organisation should be aware of them, understand why they are critical, how to implement them, and what the internal reporting process entails.
In finance, standards are used to ensure consistency across the industry. Moreover, they exist to promote transparency and to ensure the information provided is consistent, relevant, and usable - saving both time and resources for the provider as well as the party under scrutiny.
Finance teams need these standards so they can provide clear, coherent information internally and to authorities. One example of this is CFOs leading the finance function for not-for-profit charities adhering to Charity Accounting Standards.
In the application of these accounting standards, independent observers can gather and review the information they are seeking with total clarity and make informed business decisions. These standards also benefit shareholders and investors by keeping them up to date on how their business is performing.
The UK enforces this with GAAP, which involves a series of measures aimed at maintaining transparency and promoting consistency.
What is the UK GAAP?
The Financial Reporting Council (FRC) publishes accounting standards called UK Generally Accepted Accounting Practice (UK GAAP). For UK businesses, this is a regulatory body that provides guidance when preparing financial reports and accounts.
It is mandatory for businesses to prepare a balance sheet as well as a profit and loss statement and to make these available to HMRC and Companies House. In relation to consistency, UK GAAP dictates what financial documents like these should adhere to.
For finance teams, UK GAAP impacts the following activities:
- The measurement of economic activity
- Putting together economic information and summarising it
- Monitoring measurements on a regular basis
- Disclosing information about an activity
UK GAAP vs. IFRS
The UK GAAP regulations do not apply to all UK companies. To ensure compliance, listed companies use UK GAAP, while non-listed companies use International Financial Reporting Standards (IFRS).
If your company is listed on a stock exchange, it is required to follow International Financial Reporting Standards (IFRS) according to EU regulations. Therefore, non-listed companies have the option of following UK GAAP or IFRS. However, with shifting regulations due to Brexit, this could change in the future.
IFRS were introduced by the International Accounting Standards Board (IASB) in 2002, replacing the earlier IAS standards. IFRS may be better suited if your business operations involve a high level of international investment since cross-border transactions are so common in today's economy.
What does UK GAAP set out to do?
UK GAAP standards play a crucial role in ensuring that financial statements are fit-for-purpose and robust.
Keep in mind that as you examine all the requirements of UK GAAP, you're providing investors and creditors with useful information. These guidelines help you provide all relevant details regarding your business's financial health in a clear, logical manner.
The purpose of UK GAAP is to make it easier for businesses to submit their annual reports. This allows finance teams to compile documentation that is proportional to the type of entity - allowing even the largest and most complex of institutions to be compared fairly and effectively.
Taking a closer look, 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
- FRS 104 - Interim Financial Reporting
- FRS 105 - The Financial Reporting Standard Applicable to Micro-Entities
By following these standards, the reporting of financial information remains consistent, allowing bodies that review financial statements to have accurate and detailed financial information in a timely manner.
In addition to protecting creditors and shareholders, these annual statements enable businesses to make better decisions about their tax structure. In accordance with UK GAAP, these statements illustrate whether businesses are able to meet their obligations and how profitable they really are.
Balance sheets are one of the most commonly used tools for planning and reallocating resources and show how healthy the financial conditions of a company are at any given time. Taking this a step further, the income a business generates during a year determines how much it pays as well as its profits and dividends.
What are the principles of UK GAAP?
Financial accounting information must be compiled and reported objectively. When businesses rely on the finance function to steer the ship and influence decision making, the C-Suite has a right to be assured that the financial accounting information being reported on is accurate, free of bias, and maintained consistently.
A report of a business' financial data (audit, compilation, review, etc.) must therefore indicate whether or not the information contained within the statements complies with UK GAAP.
When collating information for reporting, finance teams must adhere to the following UK GAAP principles:
Principle of Regularity
The definition of regularity is compliance with enforceable rules and laws.
Principle of Consistency
This stipulates that both methods and procedures should be the same from period to period.
Principle of Sincerity
Finance should reflect in good faith the company's financial status in accordance with this principle.
Principle of the Permanence of Methods
The purpose of this principle is to ensure coherence and allow for comparison of the financial data published by the company.
Principle of Non-Compensation
Cover the full scope of financial accounting information rather than to compensate a debt with an asset or a revenue with an expense, for instance.
Principle of Prudence
By following this principle, one is aiming to present the facts "as they are" -- something should not be distorted to look more appealing than it actually is. A revenue should typically be recorded only if it is certain, and a provision for a probable expense should be noted.
Principle of Continuity
Financial information should be presented in a way as if the business is not going to be interrupted. In this case, the principle of prudence is mitigated as assets are not accounted for at their disposal value, but at their historical value.
Principle of Periodicity
A financial accounting entry should be allocated to a given period, and if it covers multiple periods, it should be divided accordingly. For example, when a customer prepays a subscription (or lease, etc.), the revenue should be divided over all the time and not entirely counted on the date of transaction.
Principle of Full Disclosure/Materiality
All financial accounting information and values regarding a business's financial position must be disclosed in the records.
How can I make sure I comply with UK GAAP?
No two industries are the same. Each industry has its own financial reporting requirements because of the differences in how it is run. Accordingly, businesses follow the accounting best practices of their industry; for instance, an airline follows different industry standards than a car manufacturer.
Being UK GAAP compliant, however, means getting your company to file and maintain financial records in such a way and standard that relevant stakeholders (such as investors, prospective buyers, auditors, lending institutions, potential partners, etc.) can gain accurate information about your company's financials.
Here are the first few steps finance teams can take to ensure UK GAAP compliance:
- Assess which reporting standards apply to your business, as well as what reduced disclosures are available.
- After identifying which standards apply to you, examine what the likely impact will be on your business.
- Ensure that your records and data are current and accurate by reviewing your internal systems and accounting policies.
- The final and most important step is to stay informed of the deadlines by which you will be required to submit various reports.
With cloud accounting software, you can produce UK GAAP-compliant financial statements and track non-GAAP metrics. The use of a financial management solution can benefit even small businesses and startups because it allows them to record financial transactions, reduce data errors and accelerate the financial close process, helping them meet their internal and external reporting requirements.
Cloud solutions give businesses access to real-time financial data from anywhere with an internet connection, enabling them to manage their businesses without being tied to any particular location.
How Advanced can help
UK GAAP standards and reporting requirements can change from year to year, but with the right cloud accounting software, you can produce financial statements that are fully compliant.
Thanks to the robust reporting capabilities of our Advanced Financials accounting software, finance teams are relieved of the burden of ensuring all changes have been implemented correctly, since any amendments or updates to UK GAAP are automatically updated and reports are rolled out.
Additionally, when you're working to comply with new regulations, having a reliable software provider, like our team at Advanced, you can lean on us for invaluable support.