Summary of main changes from the 2015 book

Publication date: 04 Apr 2016

New UK GAAP is still in its infancy and will continue to evolve over time. The October 2015 edition of the PwC ‘Similarities and differences – A comparison of old UK GAAP, new UK GAAP (FRS 102) and EU-adopted IFRS’ is being updated electronically to reflect new developments, new interpretations due to emerging practice and corrections.

Date of change

Section

Details of change

01 Apr 2016

Business combinations

“Initial accounting determined provisionally” updated to clarify the requirements for FRS 102 and IFRS.

 

 

 

Introduction

Publication date: 16 Oct 2015

This publication provides a high-level overview of the significant differences between ‘old’ UK GAAP, new UK GAAP (which, for the purposes of this publication, means FRS 102, ‘The financial reporting standard applicable in the UK and Republic of Ireland’) and EU-adopted IFRS (‘IFRS’). It focuses on a selection of those differences most commonly found in practice.

‘Old UK GAAP’ refers to the SSAPs, FRSs and UITF Abstracts in existence at March 2013, when FRS 102 was issued, which are superseded by FRS 102 when it is applicable.

‘New UK GAAP’ refers to the version of FRS 102 applicable for accounting periods beginning on or after 1 January 2015. This comprises the original version issued in March 2013, together with amendments for:

  • Basic financial instruments and hedge accounting (issued July 2014).
  • Pension obligations (issued February 2015).
  • Share-based payment transactions with cash alternatives (included in the amendments issued in July 2015).

In addition, this publication includes details of the amendments issued by the Financial Reporting Council (FRC) in July 2015, to ensure consistency with the changes in company law resulting from the EU Accounting Directive, that apply for accounting periods beginning on or after 1 January 2016.

When applying the individual accounting frameworks, companies should consult all of the relevant accounting standards and, where applicable, the relevant legislation.

Where this publication states ‘Same as old UK GAAP’ or ‘Same as IFRS’, this means that the guidance is identical to old UK GAAP or IFRS, although the standards might use different terminology or wording. Where it states ‘Similar’, this means that the guidance is not identical and there are minor differences.

Qualifying entities applying the recognition and measurement rules of IFRS may be exempt from certain disclosures if they apply the reduced disclosure framework in FRS 101, ‘Reduced disclosure framework’. In this case, there are some changes that are required to the IASB’s texts in order to ensure compliance with the Companies Act 2006. Where such a change is applicable, details are included in the relevant sections in the IFRS column below. There are equivalent disclosure exemptions in FRS 102.

Abbreviations used include:

  • FRS application guidance – the FRC’s new framework, FRS 100, ‘Application of financial reporting requirements’;
  • New UK GAAP – for the purposes of this publication, this means FRS 102, ‘The financial reporting standard applicable in the UK and Republic of Ireland’, which is based on the IFRS for SMEs but amended to permit some previous accounting treatments in old UK GAAP and to comply with the Companies Act 2006; and
  • RDF (IFRS) – EU-adopted IFRS as amended to comply with the Companies Act 2006 and reduced-disclosure framework, available for qualifying subsidiaries and parents as set out in FRS 101, ‘Reduced disclosure framework’.

While every effort has been made to ensure accuracy, information contained in this publication may not be comprehensive or information may have been omitted that may be relevant to a particular reader. In particular, this publication is not intended as a study of all aspects of old UK GAAP, new UK GAAP or IFRS, or as a substitute for reading the standards and interpretations when dealing with specific issues. No responsibility for loss to any person acting or refraining from acting as a result of any material in this publication can be accepted by PricewaterhouseCoopers. Readers should not act on the basis of this publication without seeking professional advice.

Executive summary

Publication date: 16 Oct 2015

This executive summary has the following aims: to demonstrate how converting to new UK GAAP or IFRS has implications far beyond an entity’s financial reporting function; to highlight some of the key differences between old UK GAAP, new UK GAAP and IFRS; and to encourage early consideration of the most appropriate framework to adopt in future for an entity. 

This summary takes into account authoritative pronouncements issued under UK GAAP to July 2015 and amendments to EU adopted IFRS that are effective for years ending 31 December 2015. The requirements specific to banking companies, insurance companies and limited liability partnerships are outside the scope of this publication.

This publication does not cover in detail the requirements in FRS 102 applicable to small entities (that have replaced the ‘Financial reporting standard for smaller entities (FRSSE)) or the requirements in FRS 105, ‘The financial reporting standard applicable to the micro-entities regime’.

This publication also includes details of the amendments to new UK GAAP issued by the FRC in July 2015, to ensure compliance with the new Companies, Partnerships, and Groups (Accounts and Reports) Regulations 2015 (SI 2015/980). The most significant changes impact smaller companies, but there are other changes that might be relevant to any entity reporting under new UK GAAP. Most of these amendments are effective for accounting periods beginning on or after 1 January 2016, with early adoption permitted provided that changes to company law are implemented at the same time.

If there are future changes to the standards, we will continue to update the electronic version of  this publication. This ‘Executive summary’ and the ‘Summary of the key differences’ will be published electronically and will be freely available on Inform.

Accounting areas with significant differences are outlined below.

Financial statements

Old UK GAAP: The following are required: (a) balance sheet, (b) profit and loss account, (c) statement of total recognised gain and losses, (d) cash flow statement (unless exempt), and (e) notes comprising a summary of the accounting policies, estimations and additional information.

New UK GAAP (FRS 102): The same primary statements as under IFRS are required to be presented (with some exemptions for cash flow statements). If the only changes to equity during the period are a result of profit or loss, payment of dividends, correction of prior-period material errors or changes in accounting policy, a combined statement of income and retained earnings can be presented instead of both a statement of comprehensive income and a statement of changes in equity. The formats for the income statement and balance sheet are based on company law, but as a result of changes to the law arising from the implementation of the EU Accounting Directive, entities have the option to adapt the Companies Act formats subject to minimum disclosure requirements in FRS 102. The change to the formats applies for accounting periods beginning on or after 1 January 2016. If the entity elects to early adopt the change in formats, as permitted by law, it must also adopt the July 2015 amendments to FRS 102 in full.

IFRS: Requires (a) statement of financial position, (b) statement of comprehensive income (presented as either a single statement or an income statement followed by a statement of other comprehensive income), (c) cash flow statement, (d) statement of changes in equity (presenting a reconciliation of equity items between the beginning and end of the period), and (e) notes.

Cash flow statement

Old UK GAAP: This requires the movement of cash (defined as cash in hand and deposits repayable on demand, less overdrafts) to be reported in the cash flow statement. There is no concept of ‘cash equivalents’. Cash flows are reported in greater detail (under nine standard headings) than under new UK GAAP and IFRS.

New UK GAAP (FRS 102): The presentation of the cash flow statement is similar to that under IFRS, showing movements on cash and cash equivalents, and with fewer standard headings than under old UK GAAP. New UK GAAP includes some exemptions from preparing cash flow statements, similar to old UK GAAP.

IFRS: The presentation of the cash flow statement differs substantially from the presentation under old UK GAAP. The cash flows reported under IFRS relate to movements in cash and cash equivalents (defined as short-term highly liquid investments that are readily convertible into known amounts of cash and subject to insignificant risk of changes in value). IFRS has none of the exemptions that allow many entities not to prepare cash flow statements under UK GAAP (old and new).

Financial instruments

Old UK GAAP: All entities must apply FRS 25’s presentation requirements (based on IAS 32) and company law disclosure requirements. Entities then determine which model they should apply: the ‘old pre-FRS 26 UK GAAP’ model (FRS 4, FRS 13 and, voluntarily, FRS 29) or the ‘FRS 26’ model (FRS 26 and FRS 29). This will depend on the entity’s status, in particular its listing status, and whether it follows the company law fair value accounting rules. FRS 26 is based on IAS 39, which distinguishes four measurement categories of financial assets. These are:

  • financial assets at fair value through profit or loss;
  • held-to-maturity investments (measured at amortised costs);
  • loans and receivables (measured at amortised costs); and
  • available-for-sale financial assets (measured at fair value).

For entities not applying FRS 26, financial instruments are carried at amortised cost.

New UK GAAP (FRS 102): There are two sections dealing with financial instruments: section 11 addresses simple payables and receivables, and other basic financial instruments; and section 12 addresses other, more complex financial instruments. Most basic financial instruments are measured at amortised cost; complex instruments are generally measured at fair value through profit or loss. Alternatively, instead of sections 11 and 12, entities may apply the recognition and measurement requirements of IAS 39, or the recognition and measurement requirements of IFRS 9.

The impairment model in FRS 102 is based on the principles in IAS 39 and the hedging model in IFRS 9.

IFRS (IAS 32 and 39): Same as old UK GAAP for FRS 26 reporters, because FRS 26 is based on IAS 39. All entities must apply IAS 32 and IAS 39.

IAS 39 is to be replaced by IFRS 9 which contains new rules on the classification and measurement of financial assets and financial liabilities, impairment and hedging. IFRS 9 is effective from 1 January 2018. New guidance on macro hedge accounting has not yet been finalised.

Expense recognition

Old UK GAAP: Research costs are expensed as incurred; development costs may be capitalised and amortised if specific criteria are met (as an accounting policy choice). Borrowing costs are capitalised if certain criteria are met.

New UK GAAP (FRS 102): Similar to old UK GAAP, all research costs are recognised as an expense. Capitalisation is an accounting policy choice for development costs and for borrowing costs if certain criteria are met.

IFRS: Similar to old UK GAAP, except that capitalisation of development costs is mandatory where the criteria for capitalisation are met.

Retirement benefits – defined benefit plans

Old UK GAAP: FRS 17 deals only with retirement benefits, and does not specifically address other employee benefits. Defined benefit plan liabilities are measured on an actuarial basis, using the projected unit credit method. Plan assets are measured at fair value. For the income statement, expected returns on plan assets are calculated separately from interest costs on the plan liabilities using different interest rates. Actuarial gains and losses are recognised in the statement of total recognised gains and losses in the period they arise. There is an exemption for group defined benefit plans such that, in certain circumstances, all entities in the group for their stand alone accounts can treat their participation in the plan as if it were a defined contribution plan.

New UK GAAP (FRS 102): FRS 102’s scope is wider than old UK GAAP. All employee benefits (except share-based payments) are in scope. For calculating defined benefit plan liabilities, the projected unit credit method is required. Plan assets are measured at fair value. The calculation of net interest costs under FRS 102 differs from old UK GAAP. Net interest cost is calculated by applying a single discount rate to the net defined benefit liability or asset. Remeasurements of the net defined benefit liability (that is, actuarial gains and losses) are recognised in full immediately in other comprehensive income. The accounting for group defined benefit plans differs from old UK GAAP: the cost of a defined benefit plan is recognised in the financial statements of the group entity that is legally the sponsoring employer for the plan if the net defined benefit costs are not allocated to other entities in the group.

IFRS: The scope of IAS 19 is the same as FRS 102. The projected unit credit method is required for calculating defined benefit liabilities. Plan assets are measured at fair value. Under IAS 19, remeasurements, for example actuarial gains or losses, are recognised immediately in other comprehensive income. IAS 19 is also similar to new UK GAAP in the method of calculating net interest on the net defined benefit liability or asset. For group defined benefit plans, the net defined benefit cost is recognised in the financial statements of the group entity that is legally the sponsoring employer for the plan if the net defined benefit costs are not allocated to other entities in the group.

Deferred tax

Old UK GAAP: Deferred tax is recognised based on timing differences (with certain exceptions) using an incremental liability approach – timing differences are differences between an entity’s taxable profits and its results as stated in the financial statements. This is a fundamentally different approach from IFRS. Deferred tax assets are recognised to the extent that they are recoverable (that is, it is more likely than not that there will be suitable taxable profits from which the future reversal of timing differences can be deducted).

New UK GAAP (FRS 102): Deferred tax is recognised based on timing differences, with additional recognition requirements for certain other differences (a ‘timing differences plus’ approach). This approach requires the recognition of deferred tax for timing differences on the revaluation of assets and on assets (except goodwill) and liabilities arising on a business combination. In many cases, the resulting deferred tax will be similar to the temporary difference approach under IFRS. The criteria for recognising deferred tax assets are similar to old UK GAAP and IFRS.

IFRS: Deferred tax is recognised on the basis of temporary differences. Temporary differences are differences between the carrying amount of an asset or liability in the financial statements and its tax base (that is, the amount that the entity expects will affect the taxable profit when the carrying amount of the asset or liability is recovered or settled). No deferred tax is recognised where a temporary difference arises on the initial recognition of an asset and liability in a transaction that is not a business combination and affects neither accounting profit nor taxable profit at the time of the transaction. The criteria for recognising deferred tax assets are similar to old and new UK GAAP.

Tangible and intangible fixed assets

Old UK GAAP: A cost or valuation model may be used for tangible fixed assets. Similarly, a cost or valuation model may be used for intangible assets; but a valuation model may only be used where an intangible asset has a readily ascertainable market value. There is a rebuttable presumption that goodwill and intangible assets have a useful economic life of 20 years. Goodwill with an indefinite life is not amortised. Any negative goodwill is recognised in profit or loss in the periods in which the non-monetary assets are recovered, with any excess recognised over the period expected to benefit. Goodwill and other intangibles with useful lives of more than 20 years are tested annually for impairment. Non-financial assets are tested for impairment only where there is an indication of impairment. All impairment losses (including on goodwill) may be reversed in future periods if relevant criteria are met.

New UK GAAP (FRS 102): A cost or valuation model may be used for tangible and intangible fixed assets. All intangible assets, including goodwill, are assumed to have finite lives and are amortised. If the entity is unable to make a reliable estimate, the useful life is five years (but this is changed to 10 years in the July 2015 amendments to FRS 102). It is expected that entities transitioning from old UK GAAP to FRS 102 will maintain their existing life for definite-lived intangible assets and goodwill. Non-financial assets are tested for impairment only where there is an indication of impairment. Negative goodwill is recognised in profit or loss in the periods in which the non-monetary assets are recovered, with any excess recognised over the period expected to benefit. Impairment losses for goodwill should not be reversed in subsequent periods (under the July 2015 amendments to FRS 102).

IFRS: For tangible and intangible assets, there is an accounting policy choice between the cost model and the revaluation (fair value) model. Goodwill and other intangibles with indefinite lives are reviewed annually for impairment and are not amortised. Non-financial assets with definite lives are amortised and tested for impairment only where there is an indication of impairment. Negative goodwill is recognised immediately. Impairment losses on goodwill are not reversed.

UK entities reporting under FRS 101 RDF (IFRS) must consider whether non-amortisation of goodwill is an appropriate true and fair override of the Companies Act 2006. The same will apply for indefinite-lived intangible assets when SI 2015/980 applies. Any negative goodwill is recognised in profit or loss in the periods in which the non-monetary assets are recovered, with any excess recognised over the period expected to benefit.

Investment properties

Old UK GAAP: Investment properties are included in the balance sheet at open market value (through the statement of total recognised gains and losses). The cost model is not permitted.

New UK GAAP (FRS 102): Investment property is carried at fair value (through profit or loss) if this fair value can be measured without undue cost or effort; otherwise, it is carried at cost within ‘Property, plant and equipment’.

IFRS: IAS 40, ‘Investment property’, offers a choice between fair value (through profit or loss) and the cost method.

Assets held for sale

Old UK GAAP and new UK GAAP (FRS 102): Assets held for sale are not covered; the decision to sell an asset is considered an impairment indicator.

IFRS: IFRS 5, ‘Non-current assets held for sale and discontinued operations’, requires non-current assets to be classified as held for sale where the carrying amount is recovered principally through a sale transaction rather than through continuing use.

Business combinations

Old UK GAAP: Directly attributable transaction costs are included in the cost of acquisition. The cost of acquisition should include a reasonable estimate of the present value of contingent consideration expected to be paid in the future. The cost of acquisition is adjusted when revised estimates of amounts expected to be paid in the future are made. In some circumstances, merger accounting is applied.

New UK GAAP (FRS 102): Similar to old UK GAAP. Transaction costs are included in the cost of acquisition. Contingent consideration is included as part of the acquisition cost if it is probable that the amount will be paid and it can be measured reliably. The cost of the acquisition is adjusted when revised estimates of amounts expected to be paid in the future are made. In some circumstances, merger accounting may be applied.

IFRS: Transaction costs are expensed. Contingent consideration is recognised, regardless of the probability of payment. Contingent consideration that is classified as an equity instrument is not remeasured. Changes in contingent consideration that is classified as a financial liability are recognised in profit or loss.

Investments in associates and joint ventures

Old UK GAAP: Investments in associates are generally accounted for using the equity method in consolidated financial statements. Investments in joint ventures are accounted for using the ‘gross equity’ method, which is a form of equity accounting with additional disclosures in the profit and loss account and balance sheet. Investments in associates and joint ventures apply the cost model or fair value in separate financial statements.

New UK GAAP (FRS 102): Investments in associates are generally accounted for using the equity method in consolidated financial statements. An investor that is not a parent can account for all of its investments in associates using either the cost model or the fair value model (with gains recognised either through other comprehensive income or through profit or loss).

IFRS: Investments in associates and joint ventures are accounted for using the equity method. The cost and fair value models are generally not permitted.

Summary of key differences

Publication date: 16 Oct 2015

Summary of key differences between old UK GAAP, new UK GAAP (FRS 102) and IFRS

The summary below highlights the key differences between old UK GAAP, new UK GAAP (that is, FRS 102) and IFRS.

The summary reflects the amendments to FRS 102 published in July 2015.

Subject Old UK GAAP vs New UK GAAP (FRS 102)Old UK GAAP vs IFRS IFRS vs New UK GAAP (FRS 102)
Financial statements presentation 2Company law formats apply for both, but a change in law and an amendment to FRS 102 means formats based on IFRS can be used under new UK GAAP.2Companies Act formats differ from IAS 1 formats.2IAS 1 formats differ from detailed company law formats used in FRS 102 (but under the amended FRS 102, there is also an option to use formats based on IFRS).
Cash flow statements3Cash vs Cash and cash equivalents. Also, FRS 102 has fewer headings.3Cash vs Cash and cash equivalents. Also, IFRS has fewer headings.1Both prepared for cash and cash equivalents. Similar headings.
Financial assets and liabilities:
− FRS 4 model
3 Fair values (for example, for derivatives) not used under FRS 4.3Fair values not used under FRS 4. IAS 39 has detailed rules.n/a 
− FRS 26/IAS 39 model2 Measurement of financial assets may differ as no fair value through ‘OCI’ category under new UK GAAP. Also, different rules for hedge accounting.1FRS 26 is based on IAS 39.2Measurement of financial assets may differ as no fair value through ‘OCI’ category under new UK GAAP. Also, different rules for hedge accounting.
Foreign currency (SSAP 20)2Contracted rates can be used under SSAP 20. More flexible hedging of investments in entity accounts under SSAP 202Contracted rates can be used under SSAP 20. More flexible hedging of investments in entity accounts under SSAP 20. CTA recycling under IFRS.n/a 
Foreign currency (FRS 23) 2 No recycling of CTA under new UK GAAP.1FRS 23 is based on IAS 21. 2No recycling of CTA under new UK GAAP
Hyperinflation1 1FRS 24 is based on IAS 29. UITF 9 permitted a choice of methods.1 
Revenue recognition1 1 1 
Government grants2 Policy choice (accruals/ performance model) under FRS 102. Old UK GAAP uses accruals model.1Both use the accruals model.2 Policy choice (accruals/performance model) under FRS 102. IFRS uses accrual model.
Capitalisation of borrowing costs2Policy choice under FRS 102.1Capitalisation required under both.2Policy choice under FRS 102.
Retirement benefits2Net interest cost approach and group schemes differ.2Net interest cost approach and group schemes differ.1 FRS 102 is similar to IAS 19.
Other employee benefits3No standard under old UK GAAP.3No standard under old UK GAAP.1FRS 102 is similar to IAS 19.
Share-based payment transactions2Option pricing models not always applied under FRS 102. Also, arrangements where the counterparty has a choice of settlement are treated differently. 1FRS 20 is based on IFRS 2.2Option pricing models not always applied under FRS 102. Also, arrangements where the counterparty has a choice of settlement are treated differently.
Income taxes
– Current
1 1 1 
– Deferred 3 More deferred tax under FRS 102 ‘timing differences plus’ approach. Unlike old GAAP there are no exceptions for revaluations, rollover and unremitted earnings A temporary difference approach is applied for business combinations.3 Timing difference with exceptions vs temporary difference approaches.2 Timing difference ‘plus’ vs temporary difference approaches although in many cases the resulting deferred tax from the different approaches will be the same.
Intangible assets other than goodwill2More intangibles under FRS 102 and no indefinite life.2More intangibles under IFRS.2IFRS can have indefinite-lived intangibles.
Property, plant and equipment1 1 1 
Investment property2 Fair value movement in statement of total recognised gains and losses (old UK GAAP) vs profit or loss (FRS 102).2 Fair value movement in statement of total recognised gains and losses (old UK GAAP) vs profit or loss (IFRS).1Fair value movement in profit or loss for both.
Impairment of non-financial assets2 Annual impairment testing required for some goodwill and intangibles under old UK GAAP. Reversals of goodwill impairments will be prohibited under FRS 102. 2Allocation and reversal of impairment losses differ. 1 Same, when the July 2015 amendment to FRS 101 prohibiting reversal of impairment of goodwill applies.
Leases2Guidance more detailed in old UK GAAP. No 90% test in FRS 102.2Different methods for lessor accounting. Guidance more detailed in old UK GAAP. No 90% test in IFRS.1 
Inventories1 1 1 
Provisions and contingencies1 1 1 
Events after the reporting period1 1FRS 21 is based on IAS 10.1 
Consolidation2Subsidiaries held in investment portfolios are not consolidated under FRS 102. 2No remeasurement of pre-existing or retained stakes under old UK GAAP. Investment entities are not consolidated under IFRS.2No remeasurement of pre-existing or retained stakes under FRS 102.
Business combinations (including goodwill)2Goodwill has to be amortised under FRS 102. Useful life is no longer ‘presumed’ to be 20 years (as it was under old UK GAAP). 2Goodwill is not amortised under IFRS. Accounting for transaction costs and contingent consideration differs under IFRS.2Goodwill is not amortised under IFRS. Accounting for transaction costs and contingent consideration differs under IFRS.
Discontinued operations and assets held for sale2Different definitions for discontinued operations. No concept of assets held for sale in either GAAP.3FRS 3 differs from IFRS 5. 3FRS 102 does not deal with assets held for sale.
Investments in associates1 1 1 
Investments in joint ventures (IFRS 11)1 1 1  
Related-party transactions1Similar definitions and disclosures.1Similar definitions and disclosures.1Similar definitions and disclosures.
Specialised activities (agriculture)2Cost or fair value policy choice under FRS 102. No specific guidance under old UK GAAP.3No fair value standard under old UK GAAP.2Cost or fair value policy choice under FRS 102. IFRS requires fair values.
Service concession arrangements3FRS 102 includes an intangible asset model for operators.3Old UK GAAP covers accounting by grantors. IFRS includes an intangible asset model for operators.2FRS 102 covers accounting by grantors.

 

Key:

1 Same or minor differences
2 Some differences
3 Significant differences
 
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