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 form and content provisions to be used when preparing financial statements are set out in SI 2008 No 409 (Small Companies and Groups) and SI 2008 No 410 (Large and Medium-sized Companies and Groups).

Accounting standards

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 as Financial Reporting Standards (FRS). 

In its ‘Foreword to Accounting Standards’, the FRC explains the relationship between accounting standards and true and fair view as:

Accounting standards are applicable to the financial statements of a reporting entity that are required to give a true and fair view of its financial position at the reporting date and of its profit or loss (or income and expenditure) for the reporting period.

The purpose of accounting standards is to provide for recognition, measurement, presentation and disclosure for specific aspects of financial reporting in a way that reflects economic reality and hence provides 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.

The current standards in issue are as follows and are available on the FRC website (link is external): 

FRS 100 Application of Financial Reporting Requirements 

FRS 101 Reduced Disclosure Framework 

FRS 102 The Financial Reporting Standard Applicable in the UK and Republic of Ireland 

FRS 103 Insurance Contracts 

FRS 104 Interim Financial Reporting 

FRS 105 The Financial Reporting Standard applicable to the micro-entities regime 

FRS 101 sets out a reduced disclosure framework which addresses the financial reporting requirements and disclosure exemptions for the individual financial statements of subsidiaries and ultimate parents that otherwise apply the recognition, measurement and disclosure requirements of adopted IFRS.  

‘Old UK GAAP’ 

Old UK GAAP (link is external) refers collectively to the range of standards which applied to accounting periods beginning prior to 1 January 2015.  These include FRSs, the Financial Reporting Standard for Smaller Entities (FRSSE), Statements of Standard Accounting Practice (SSAP), Financial Reporting Exposure Drafts (FRED) and Reporting Statements, These standards have now been withdrawn and have been replaced by FRS 100 – 105 listed above.