OT02020 - Oil industry accounting: Companies Act 2006 and use and application of accounting standards in the UK

Companies Act 2006

The Companies Act 2006 (CA2006) imposes a duty on the directors of UK incorporated companies to prepare annual financial statements in accordance with either UK GAAP or EU-adopted IFRS and that these financial statements show a true and fair view of the assets, liabilities, financial position and profit or loss of the company. These financial statements also need to comply with the provisions of the Companies Act 2006 as to form and content. See Part 15 CA2006 and in particular Chapter 4.

However, some exceptions are available to smaller companies as defined by CA2006.

In addition, UK listed companies must comply with Article 4 of the IAS regulation.

For the Corporation Tax Acts, generally accepted accounting practice is practice with respect to the accounts of UK companies that are intended to give a true and fair view and, in respect of IAS accounts, generally accepted accounting practice in relation to IAS accounts. (CTA10\S1127).

Use and application of accounting standards in the UK

Accounting standards (See OT02003 Oil Industry accounting: Generally Accepted Accounting Practice) are authoritative statements of how particular types of transaction and other events should be reflected in financial statements, and compliance with them will normally be necessary for them to give a true and fair view. A departure is likely to be justified only in exceptional circumstances and in this event the reasons for it and the financial effect must be disclosed.

The standards do not automatically apply to overseas incorporated companies, even if they are subsidiaries of a UK incorporated parent, or to their branches trading in the UK. These companies and branches will prepare their accounts in accordance with the accounting standards prescribed by local regulation.

Where financial statements prepared under foreign accounting standards run contrary to UK tax principles, appropriate adjustments will need to be made for the purposes of tax. This is because the starting point for computations is the profits of a trade computed on an accounting basis which gives a true and fair view, subject to any adjustment required or authorised by law in computing profits for those purposes (CTA09\S46). From FA04 both UK GAAP and International Accounting Standards are acceptable bases for UK tax purposes.