BIM31020 - Tax and accountancy: meaning of ‘UK generally accepted accounting practice’
S997 Income Tax Act 2007, S1127 Corporation Act 2010
UK generally accepted accounting practice (UK GAAP) means generally accepted accounting practice with respect to accounts of companies formed or incorporated under the law of a part of the UK that is intended to give a true and fair view. The same definition applies to individuals, entities that are not companies and companies which are not UK companies.
UK GAAP has no statutory or regulatory definition in the UK. UK GAAP encompasses the accounting principles contained in the accounting standards issued or adopted by the Financial Reporting Council. It extends also to the requirements of the Companies Act and the Stock Exchange as well as other acceptable accounting and industry treatments not contained in official literature.
True and fair view
S396 Companies Act 2006 (CA 2006) (S404 for group accounts) specifies that the directors of every company have to prepare a balance sheet and a profit and loss account every financial year and that the balance sheet must give a true and fair view of the state of affairs of the company as at the end of the financial year, and the profit and loss account must give a true and fair view of the profit or loss of the company for the financial year.
The requirement that all financial statements which are prepared for the purpose of compliance with the Companies Acts should give a ‘true and fair view’ was first introduced in the Companies Act 1947, which amended the former phrase ‘true and correct’.
The concept of ‘true and fair view’ was adopted for the whole of the European Community by the EC Council in its Fourth Directive 78/660/EEC, which laid down the form and content of company accounts. This was implemented in the UK and the form and content provisions are now in SI 2008 No 409 and SI 2008 No 410.
S464 CA 2006 defines ‘accounting standards’ as statements of standard accounting practice issued by prescribed bodies. The Financial Reporting Council (FRC) is the prescribed standard setting body for the purposes of Section 464. Standards issued by it or by its immediate predecessor the Accounting Standards Board are designated FRS. Earlier accounting standards are designated SSAP.
In its ‘Foreword to Accounting Standards’, the FRC explains the relationship between accounting standards and true and fair view as:
‘Accounting standards are authoritative statements of how particular types of transaction and other events should be reflected in financial statements and accordingly compliance with accounting standards will be necessary for financial statements to give a true and fair view’.
Because the standards are formulated with the objective of ensuring that information resulting from their application faithfully represents the underlying commercial activity the FRC envisages that only in exceptional circumstances will departure from the requirement of a standard be necessary in order to ensure a true and fair view. The true and fair view has the ultimate legal override.
In 2012 and 2013 the FRC issued three new accounting standards which will fundamentally reform financial reporting in the UK and Republic of Ireland:
All SSAPs and FRSs issued prior to FRS 100, with the single exception of FRS 27, will be withdrawn for accounting periods commencing on or after 1 January 2015. It is expected that FRS 27 will eventually be replaced by a fourth new standard, FRS 103 ‘Insurance Contracts’ which has not yet been issued.