What Are the Accounting Standards Used in the UK?

There is a need for uniformity in organisation tasks, particularly those that have to do with accounting. To attain this consistency, professional organisations have created standards businesses must follow. Nevertheless, these standards usually have a level of disparity depending on the country in which they were established. In this article, we look at accounting standards used in the UK.

Understanding Accounting Standards

In simple words, accounting standards are standardised guiding principles that determine the practices and policies of financial accounting. Accounting standards don’t just improve the transparency of financial reporting but also facilitate financial accountability.

Accounting standards are relevant to a company’s financial reporting. Some famous examples of accounting standards are goodwill accounting, business combination, segment reporting, lease classification, revenue recognition, a measure of outstanding shares, and an acceptable method of depreciation.

Two popular accounting standards are used by a majority of countries globally. These are Generally Accepted Accounting Procedures, GAAP, International Financial Reporting Standards, or IFRS. In this article, we will take a deeper look at the accounting standards used in the UK.

Accounting Standards in the UK

Since 2005, listed companies in the United Kingdom have needed to prepare their consolidated financial statements according to International Financial Reporting Standards (IFRS Accounting Standards). Nearly all the other companies and groups have an option. They can opt to follow UK GAAP or IFRS Accounting Standards.

For periods starting on or later than 1st January 2015, FRSs 100, 101, and 102 were implemented, bringing various other options for all UK groups and entities. These Accounting Standards replaced UK GAAP.

Along with the three Standards mentioned above, two different Standards were implemented from 1st January 2015. These include:

  • FRS 103 Insurance Contracts contain particular accounting requirements for businesses that have insurance contracts and are applying FRS 102.
  • FRS 104 Interim Financial Reporting is used when preparing interim financial reports by entities that use FRS 102.
  • FRS 105 The Financial Reporting Standard applicable to the Micro Entities Regime is a financial reporting standard that applies to businesses using the micro-entities regime.

Businesses operating within specialised sectors or industries will also apply the requirements of their particular Statement of Recommended Practice along with the Financial Reporting Standards. A lot of the SORP-issuing entities have updated their SERPs by FRS 102.

Importance of Accounting Standards

Accounting standards are essential due to multiple reasons, including:

  • They ensure uniformity in financial statements across companies so that investors can understand them clearly and quickly and take appropriate decisions regarding the investment.
  • If similar accounting standards are followed internationally, individuals can explore career opportunities in accounting in any part of the world.
  • Accounting standards guide companies in developing and maintaining their account reports that establish a common international accounting language across the globe.
  • It allows everyone to have a single framework for recording all the company transactions.

Advantages of Accounting Standards

When companies release financial statements, auditors often emphasise checking everything according to the relevant financial accounting framework and standards. Even though this almost sounds like a filler statement, it’s essential. Here is a list of the primary advantages of following accounting standards.

1.      Maintains Uniformity

One key advantage of using financial accounting standards is that there will be an unmatchable consistency in the market. This is because all public companies depending on investors, generally have to follow the exact principles. This way, the investors can gauge the company’s performance by comparing it to a generalised set of universally applicable benchmarks.

2.      Fair Valuations and Estimates

All accounting standards stress the subject of fair representation that has to be met through judgment-call valuations and reasonable estimates. Even though the simple use of the word “reasonable” usually gives room for various interpretations, governing bodies tend to check subjective forecasts closely. These are related to things such as recording procedures and methods of inventory valuation that could give the business a comparative advantage.

For example, a business could value its inventory at a meagre cost to lower its cost of goods sold account. Consequently, the net income could shoot up. Thankfully, accounting standards help to prevent these types of manipulations and fraud.

3.      Improves Reliability

Several stakeholders are involved in a company and depend on the financial statements for their information. Many of these stakeholders base their decisions on the data offered by these financial statements.

Thus, these statements must provide a fair and accurate picture of the company’s financial situation. The accounting standards make sure of this – they ensure the words are trustworthy and reliable.

4.      Assists Auditors

Adherence to standard accounting practices makes it possible to perform external audits. As the same accounting practices are being followed throughout the country, it’s easy for auditors to interpret and read the financial statements of any business they’re hired to investigate. If every corporation-maintained records using its systems, auditors would need to depend on internal accountants to explain the procedure. This would make the auditing process vulnerable to internal interference.

5.      Promotes Managerial Accountability

Universal accounting standards ensure managerial accountability within businesses. When businesses adhere to these standards, consistency and transparency in recordkeeping, allow accurate comparisons between companies. The measures make it possible to evaluate key performance indicators such as financial solvency, yearly profitability, future progress, etc.

Evaluating these key indicators and comparing them with the performance of similar corporations enables stakeholders and board members to hold managers accountable for the company’s performance.

Last Few Words

We hope this article helped you gain insight into the accounting standards in the UK. Remember that accounting standards are the key to corporate responsibility and the success of free markets. They safeguard investors from false information and secure organisations from corporate fraud, which could destabilase the economy and shake consumer confidence. Thankfully, competent accountants know the benefits of accounting standards and wish to review and improve them regularly.

Contact us today at ISA Consortium if you need any assistance with accounting. Our team of experts can help you manage your accounting records in the best possible way!

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