Final stage interview - need help on UK accounting standards!

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woodchuck
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I have a final stage interview for a role in industry coming up - in the first interview they asked me about accounting standards - i cannot really get my head around the different standards and just had to waffle about how different organisations have different standards.

As i now understand it the UK has GAAP and FRS (of which there are a load of standards based upon what you are accounting for). These different FRSs each outline, for instance, when you recognise revenue and how to recognise fixed assets, contingent liabilities / assets and so on? Is this correct?

Finally, does anyone know how GAAP and FRS fit together? are they standards which must both be followed?

many thanks for any help
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natninja
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(Original post by woodchuck)
I have a final stage interview for a role in industry coming up - in the first interview they asked me about accounting standards - i cannot really get my head around the different standards and just had to waffle about how different organisations have different standards.

As i now understand it the UK has GAAP and FRS (of which there are a load of standards based upon what you are accounting for). These different FRSs each outline, for instance, when you recognise revenue and how to recognise fixed assets, contingent liabilities / assets and so on? Is this correct?

Finally, does anyone know how GAAP and FRS fit together? are they standards which must both be followed?

many thanks for any help
Right so in the UK the financial reporting frameworks are as follows:

FRS101
FRS102
IFRS

All entities have to prepare their statutory reports by these. FRS101 is a reduced disclosure version of IFRS and only some companies are eligible to use it (and that's only if their parent is reporting in full IFRS!). FRS102 is the new version of UK GAAP and is very closely aligned with IFRS as part of global convergence in accounting standards. IFRS is the international financial reporting standards and is generally considered best practice as it is used in other countries too (all listed entities must report in IFRS). There are no rules for internal management accounts. Each set of standards will have its guidance for applying a similar set of principles and some may point to others (i.e. section 11 of FRS102 says to use IFRS9 for certain financial instruments). IFRS actually consists of two parts - the IFRSs and IASs both of which must be applied. The individual standards making up each framework specify things like recognition criteria, intial and subsequent measurement, application guidance for edge cases etc. Once you choose a framework you need to use all the standards making up that framework.
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woodchuck
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(Original post by natninja)
Right so in the UK the financial reporting frameworks are as follows:

FRS101
FRS102
IFRS

All entities have to prepare their statutory reports by these. FRS101 is a reduced disclosure version of IFRS and only some companies are eligible to use it (and that's only if their parent is reporting in full IFRS!). FRS102 is the new version of UK GAAP and is very closely aligned with IFRS as part of global convergence in accounting standards. IFRS is the international financial reporting standards and is generally considered best practice as it is used in other countries too (all listed entities must report in IFRS). There are no rules for internal management accounts. Each set of standards will have its guidance for applying a similar set of principles and some may point to others (i.e. section 11 of FRS102 says to use IFRS9 for certain financial instruments). IFRS actually consists of two parts - the IFRSs and IASs both of which must be applied. The individual standards making up each framework specify things like recognition criteria, intial and subsequent measurement, application guidance for edge cases etc. Once you choose a framework you need to use all the standards making up that framework.
thanks for that, much appreciated.

the firm i'm interviewing at is a subsidiary (ltd i think) of a large privately held german AG. so this probably means a set of accounts would need to be done for statutory purposes for the UK authorities, and one for the parent company for their own use.

the accounts for the UK authorities would have to comply with FRS102 (which is the new version of GAAP), which is similar to IFRS. IFRS is made up of both reporting standards (IFRS) and accounting standards (IAS). each of the standards making up the framework will have a set of guiding principles depending on the thing you account on and others like recognition of revenue etc. you cannot pick and choose standard you use - once you've picked one you have to follow all the guidance in the framework.

on the other hand, the reports and accounts to the parent in Germany are not governed by any standards and can be in any form you like.

does that sound right?

thanks again!
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natninja
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(Original post by woodchuck)
thanks for that, much appreciated.

the firm i'm interviewing at is a subsidiary (ltd i think) of a large privately held german AG. so this probably means a set of accounts would need to be done for statutory purposes for the UK authorities, and one for the parent company for their own use.

the accounts for the UK authorities would have to comply with FRS102 (which is the new version of GAAP), which is similar to IFRS. IFRS is made up of both reporting standards (IFRS) and accounting standards (IAS). each of the standards making up the framework will have a set of guiding principles depending on the thing you account on and others like recognition of revenue etc. you cannot pick and choose standard you use - once you've picked one you have to follow all the guidance in the framework.

on the other hand, the reports and accounts to the parent in Germany are not governed by any standards and can be in any form you like.

does that sound right?

thanks again!
Not really no...

They'd have to submit at least two, and possibly three, sets of accounts - UK statutory accounts, consolidation information for the German parent to include in it's statutory accounts and potentially internal accounts.

The UK stats could comply with FRS102 or FRS100 (IFRS). (You can and should check which on Companies House). It's likely IFRS would be chosen as it would minimise additional costs of compliance in preparation of consolidation information for the parent which must report in IFRSs as adopted by the European Union.

There are no rules relating to the form of internal management accounts.

On a serious note, I suggest you read some of the standards yourself. Also you should probably know when the new standards (IFRS 9, 15, 16 and 17) come into force and their implications in a broad sense.
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ajj2000
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(Original post by woodchuck)
thanks for that, much appreciated.

the firm i'm interviewing at is a subsidiary (ltd i think) of a large privately held german AG. so this probably means a set of accounts would need to be done for statutory purposes for the UK authorities, and one for the parent company for their own use.


thanks again!
Look at is this way. GAAP stands for Generally Accepted Accounting Principles. Different countries (and industries in some cases) will apply different accounting principles.

A UK company will normally report under UK GAAP (primarily the rules and guidance within Financial Reporting Standards (FRS)). The rules applied depend on a number of factors including company size and ownership type.

Under EU rules EU listed companies report under EU requirements - which incorporate International Financial Reporting Standards (IFRS). Thus UK listed companies report under IFRS - subsidiaries may report under UK GAAP. As notes above UK GAAP has been alligning closely with IFRS.

One thing you may wish to check is whether the German company you are applying to is privately held - my understanding is that AG normally refers to companies which may be traded on a stock market.

So how does this matter?

For compliance reasons, the accountants in the UK subsidiary of a German parent will keep records which comply with Companies Act regulations (so meet UK GAAP and other UK requirements). Other UK requirements would include retaining records required for tax purposes, such as splits of expenditure into allowance and non allowable items.

They will likely report up to the parent company on at least a monthly basis in a format given by the parent company - likely to be IFRS plus an particular rules and additional information required by the parent company. This is likely to be more onerous at the year end.

Of interest, many large companies are listed in more than one country.

Lets imagine a UK subsidiary of Siemens AG - a German conglomerate.

The UK subsid may report under IFRS or UK GAAP. You could look at the latest accounts on https://beta.companieshouse.gov.uk/ to see which. A quick look at Siemens UK subsids indicates that both are used (I'm not sure why).

Reporting to Siemens Group will need to comply with their reporting requirements (IFRS). However, Siemens also report under US GAAP, which unlike UK GAAP is frequently very different from IFRS. This means the accounts team will have to analyse some data differently, and be aware that some transactions may give very different outcomes under different rules.

Perhaps for your interview you should consider that metrics people consider pretty standard, such as turnover and profit, can be anything but. Companies which report profits under US GAAP may report losses under IFRS given differing rules, and turnover figures can differ considerably between the two. Senior finance people spend a lot of energy understanding how the differing rules may affect the way their company is viewed.
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