Mind the GAAP: Are you ready for the new reporting regime?

For the last decade, UK companies listed on the stock exchange have been required to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The standards have been introduced as part of global efforts to converge reporting practices, with a view to simplifying international trade and investment, creating greater levels of transparency for organisations, and reducing cost and complexity.

Most other organisations have a choice as to whether they adopt IFRS, or, as permitted by the Companies Act 2006, continue to use Generally Applied Accounting Principles (UK GAAP). These standards have developed over many years, specific to the British business regime, and they continue to evolve. Indeed from January 1st 2015, three new Financial Reporting Standards (FRS 100, 101 and 102) will come into force, creating a number of new options for accountants and other finance professionals to consider.

FRS 100 sets out the overall framework for financial reporting, explaining which standards apply to which types of entity, when they can apply the reduced disclosure framework; and when they should follow a Statement of Recommended Practice. FRS 101 sets out a reduced disclosure framework, and FRS 102 introduces a single standard for SMEs, based broadly on the IFRS adopted by the European Union.

A different reporting landscape

Under the Financial Reporting Council's new regime, the landscape will be very different, with financial reporting requirements depending on the nature and size of an entity. Organisations which report under current UK GAAP need to consider where they fit within the revised framework, and what options they have going forwards.

Small companies have three choices - they can use the Financial Reporting Standard for Smaller Entities (FRSSE), FRS 102 or European Union-adopted IFRS. Larger private companies - those which are not required to use IFRS - can select between FRS 102 under the revised GAAP framework, or switch over to the EU-adopted international standards.

Some private companies may choose to adopt IFRS out of choice, however the Institute of Chartered Accountants in England and Wales (ICAEW) expects the majority of medium-sized and large firms to apply FRS 102 in future when preparing their annual financial statements.

Changes to UK GAAP

The new framework does not bring the UK in-line with IFRS - the converged standards used by all public companies. However, it does move the UK regime closer to these international standards. ICAEW explains that FRS 102 is based on the IFRS for SMEs, although it notes the text has been amended in some significant respects. The upshot of this, it says, is that FRS 102 is not as radically different from current UK GAAP as was originally expected. That said, there are some key differences which organisations need to understand.

Some of the major changes include the introduction of a new regime for financial instruments, in particular bringing all derivatives on balance sheet at fair value. New UK GAAP is also introducing requirements for defined benefit pension plans, including bringing group plan deficits onto the balance sheet of at least one individual entity. Accounts will be required to carry investment properties at fair value, with revaluation gains and losses recognised in profit or loss whenever reliable measurements are viable.

Additionally, more intangible assets will need to be recognised separately from goodwill when there is a business combination. Additional deferred tax must be recognised - for example on revaluations of property, plant and equipment - and merger accounting will only be allowed for group reconstructions and certain business combinations involving public benefit entities.

Getting ready for the change

Finance leaders need to ensure they are fully prepared for the transition to a new reporting regime to improve their business risk. The first new UK GAAP financial statements are required for the year ending December 31st 2015, and as such, the date of the opening balance sheet will be January 1st 2014. Management need to think about the impacts of change on their organisations, within the finance team and beyond. The decisions they make now will have significant impacts on financial reporting, tax and wider business processes.

Two-thirds of companies will be undergoing a conversion from UK GAAP to another reporting standard. According to research conducted by Robert Half, 28% will be moving to FRS 101, 23% to FRS 102 and 23% to full International Financial Reporting Standards. Another quarter (25%) of respondents said they are still unsure as to their intended course of action.

The fact that 25% of CFOs do not know which reporting standard they will move to suggests a lack of awareness about the process among senior financial leaders. Some 55% plan to fill this knowledge gap by hiring additional permanent staff, while 34% will take on temporary workers. Nearly a quarter of organisations (24%) are planning to engage senior interim professionals to smooth over the migration, and 9% will go as far as to engage a consulting firm. Over a third of companies are planning to upskill their own workforce in order to prepare for the impending change.

Finance professionals who understand the changes to UK GAAP and the potential implications for organisations may find themselves in greater demand. As CFOs look to increase their recruiting to build up their teams, they will be looking for individuals who can fit in seamlessly to the workforce, but also bring pre-existing knowledge about the new financial reporting framework.