OT02003 - Oil Industry accounting: Generally Accepted Accounting Practice

Generally Accepted Accounting Practice in the UK (UK GAAP)

Generally accepted accounting practice in the UK (UK GAAP) is the body of accounting standards and other guidance published by the UK’s Financial Reporting Council (FRC). A new financial accounting framework became effective in the UK from 1 January 2015. It consists of:

  • FRS 100 Application of Financial Reporting Requirements (sets out the overall framework for new UK GAAP);
  • FRS 101 Reduced Disclosure Framework (sets out the disclosure exemptions from IFRS for qualifying entities);
  • FRS 102 The Financial Reporting Standard applicable in the UK and the Republic of Ireland (sets out in detail the requirements that entities adopting the new UK GAAP need to follow);
  • FRS 103 Insurance Contracts (applies to issuers of insurance contracts reporting under FRS 102);
  • FRS 104 Interim Financial Reporting and
  • FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime (effective from 1 January 2016).

The new framework has replaced all previously issued Financial Reporting Standards or FRSs, Statements of Standard Accounting Practice (SSAPs) and the Abstracts issued by the Accounting Standards Board’s (ASB) Urgent Issues Task Force (UITFs).

Companies in the UK can also choose to apply International Financial Reporting Standards (IFRSs).

International Financial Reporting Standards (IFRS - also referred to as IAS).

As of 1 January 2005 EC Regulation has required consolidated group accounts of listed plc’s to be prepared under IFRS. As noted above, in the UK, companies can choose to prepare individual accounts under either IFRS or UK GAAP. The UK Parent has responsibility to ensure its subsidiaries prepare accounts using a consistent accounting framework unless there is good reason not to.

The Companies and Limited Liability Partnerships (Accounts and Audit Exemptions and Change of Accounting Framework) Regulations 2012 (SI 2012/2301) changed the law to allow a company that prepares individual IFRS accounts to switch to one of the UK GAAP frameworks listed above (i.e. FRS 101 or FRS 102) provided they have not previously switched in the prior five years.

IFRS is comprised of:

  • International Accounting Standards (IAS);
  • International Financial Reporting Standards (IFRS);
  • Standing Interpretations Committee (SIC) Interpretations; and
  • International Financial Reporting Interpretations Committee (IFRIC) Interpretations issued and adopted by the International Accounting Standards Board (IASB).

In 2004, the IASB issued IFRS 6 Exploration for and Evaluation of Mineral Resources - see OT02030 for details.

CTA10\S1127 recognises that companies have the choice as to whether to prepare their accounts under UK GAAP or IFRS and has extended the meaning of generally accepted accounting practice for tax purposes to include UK GAAP and IFRS.

Future developments

There are three new international accounting standards which have been endorsed by the EU and are applicable for years beginning on or after 1 January 2018 and beyond.

IFRS 9 Financial Instruments

IFRS 9 is effective for accounting periods beginning on or after 1 January 2018 and covers classification and measurement, hedging and impairment of financial assets and financial liabilities. Early adoption is permitted. IFRS 9 replaces the existing guidance contained within IAS 39 Financial Instruments: Recognition and Measurement. The impact on entities within the oil and gas sector will vary and will depend on the nature of the instruments that they hold.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 is effective for accounting periods beginning on or after 1 January 2018. The standard applies to contracts with customers and entities in the oil and gas sector will be within its scope. Early adoption is permitted. Any complex contractual arrangements relating to the sale of products or services will require careful consideration in light of the new requirements. Depending on the arrangements in place there could be an impact on when to recognise revenue and how to measure it.

IFRS 16 Leases

IFRS 16 is effective for accounting periods beginning on or after 1 January 2019, early adoption is permitted but only in conjunction with IFRS 15. IFRS 16 states that a contract contains a lease if there is an identified asset and the contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration. Under IFRS 16 lessees will no longer be required to differentiate between finance and operating leases. For the majority of lease contracts the lessee will be required to recognise a right-of-use asset and a corresponding lease liability. There are no substantial changes to lessor accounting.

These standards will be considered by the FRC as part of its triennial review of UK GAAP.