Strategy, Legal & Operations

What are the Generally Accepted Accounting Practice (GAAP) standards?

Learn what’s legally required of UK-incorporated companies under Generally Accepted Accounting Practice (UK GAAP), including how the Financial Reporting Standards (FRS) and UK-adopted IFRS frameworks apply. Find out how to choose the right one for your business and what it means to stay compliant.

31 July, 20259 min read Share

When organisations and businesses in the UK incorporate, they’re legally required to prepare financial documents that follow the UK GAAP standards.

GAAP stands for Generally Accepted Accounting Practice.

Here in the UK, complying with GAAP principles accounting means adopting either UK GAAP (which includes FRS 100–105), or UK-adopted IFRS, depending on the business size, type and requirements.

Read on to learn more about what UK GAAP means for businesses, and what they must do to be GAAP compliant.

Here’s what we cover:

What is UK GAAP?

The UK Generally Accepted Accounting Practice, commonly abbreviated to UK GAAP, is the set of standardised principles that businesses and professionals in the UK must follow in the preparation of financial documents and, by extension, when undertaking their everyday accounting.

UK GAAP is mandatory for most private limited companies, unless they have opted to use UK-adopted International Financial Reporting Standards (IFRS).

Publicly listed companies have no choice and must use UK-adopted IFRS.

The Financial Reporting Council (FRC)—the UK’s independent regulator—sets and enforces UK GAAP to promote transparency and integrity in business.

To be UK GAAP compliant, companies must provide a “true and fair view” of their assets, liabilities, financial position, and profit or loss.

They must undertake tasks like filing accounts with Companies House, and follow disclosure requirements, such as providing a breakdown of fixed assets.

The UK GAAP standards impact all finance team activities, including measuring and reporting on economic activity, monitoring how this activity is measured, and disclosing information about the activity.

UK GAAP helps create a level playing field—making reports easier to understand and compare across different organisations.

It also reduces the risk of misleading financial reporting.

Why do I have to use UK GAAP in my business?

Incorporated businesses in the UK are legally required under the Companies Act 2006 to prepare financial statements that give a true and fair view, in accordance with either UK-adopted IFRS or UK GAAP (which includes FRS 100 to 105), depending on the company’s size and status.

Company directors must ensure that appropriate financial reporting standards are in place.

If they don’t, they can be held liable in court for potential breaches of directors’ duty under the Companies Act 2006, while HMRC can impose penalties and Companies House might reject the accounts.

Public listed companies on UK-regulated markets are required to use UK-adopted IFRS and cannot apply UK GAAP or the FRS standards for their group financial statements.

Unincorporated businesses such as sole traders and unincorporated partnerships are not required to follow UK GAAP.

What are the UK GAAP standards (FRS)?

UK-specific GAAP compliance usually means following one of the several FRS as issued by the FRC:

• FRS 100 Application of Financial Reporting Requirements
• FRS 101 Reduced Disclosure Framework
• FRS 102 The Financial Reporting Standard
• FRS 103 Insurance Contracts
• FRS 104 Interim Financial Reporting
• FRS 105 The Financial Reporting Standard applicable to the Micro‑entities Regime

In real-world terms, and if an incorporated company has not opted to use the more complex UK-adopted IFRS, it must choose one of four UK GAAP regimes for its annual accounting and reporting:

• FRS 101
• FRS 102
• FRS 102 Section 1A
• FRS 105

The directors select the most appropriate regime based on the size and specific needs of the business.

How do I choose the right UK GAAP FRS for my business?

The intention of the FRC when creating FRS regimes was to ensure their complexity matches the needs of the business.

After all, there’s no need for a smaller limited company to take on the same reporting requirements as a multinational PLC. Doing so could impose unnecessary costs and complexity.

Assuming a company hasn’t chosen to follow UK-adopted IFRS, FRS 102 is the standard most medium and large companies follow, unless they qualify for a simpler regime like FRS 105 or FRS 102 Section 1A.

These simpler alternatives are available to smaller businesses provided they do not exceed two of the listed criteria within 12 months, as follows:

Business type	Criteria (must not exceed two of these within a period of 12 months)
FRS 105 for Micro-Entities	£632,000 turnover £316,000 balance sheet total 10 average number of employees
FRS 102 reduced disclosure regime for small entities within section 1A	£10.2 million turnover £5.1 million balance sheet total 50 average number of employees

Thresholds for the criteria above change regularly, so it’s best to check with a business tax specialist to stay up to date.

UK subsidiaries can use the FRS 101 Reduced Disclosure Framework if their parent company prepares consolidated accounts under UK-adopted IFRS.

Think of it as a streamlined version of UK-adopted IFRS—designed specifically for subsidiaries.

What do I have to do to be compliant with UK GAAP/FRS?

The requirements of the FRS are complicated and expert advice should be sought if you’re in any doubt as to your own company’s requirements under them.

However, the requirements can be listed as follows, broadly summarised from FRS 102:

1. Recognition and measurement

Recognise and measure assets, liabilities, income, and expenses using the historic cost method by default. Where required, apply fair value—and always use the accruals basis for income and expenditure.

Note that FRS 105 allows for simplifications.

Key sections to consider include: financial statements, tangible assets, intangible assets and goodwill, leases, provisions and contingencies, revenue recognition, financial instruments, employee benefits, income tax, and consolidated accounts (if applicable)

2. Complete set of required financial statements

This is understandably the meat of the FRS, and at a minimum, FRS 102-compliant accounts must include:

• Statement of financial position (balance sheet).
• Statement of comprehensive income (or income statement + separate statement of comprehensive income).
• Statement of changes in equity if applicable (unless exempt).
• Cash flow statement.
• Notes to the financial statements.

Small entities using FRS 102 reduced disclosure regime for small entities within section 1A are exempt from preparing a cash flow statement and can use reduced disclosures.

3. Disclosure requirements

FRS 102 includes extensive disclosure requirements across all areas such as accounting policies, assumptions, risks, related party transactions, and so forth.

Even small entities under Section 1A must include:

• Description of accounting policies.
• Judgements and estimates.
• Related party disclosures (some exemptions apply).

4. Keeping accounting records and supporting evidence

Businesses must maintain accurate and complete records that support the amounts in the accounts. This is both an FRS 102 requirement and a legal duty under the Companies Act 2006.

5. Legal compliance

Company directors have a legal duty under the Companies Act 2006 to ensure that the company’s financial statements comply with the applicable financial reporting framework, including the relevant FRS.

6. Filing with Companies House

This is a legal requirement under the Companies Act.

How do the GAAP accounting principles apply to UK GAAP/FRS?

In the United States, there are several accounting principles often taught as part of GAAP.

These include:

• Economic Entity Assumption: financial transactions of a business must be kept separate from those of its owners.
• Monetary Unit Assumption: all financial records should be denominated in a monetary currency, which would usually be the same currency in which the accounts were prepared.
• Time Period Assumption: businesses are expected to report all financial statements within a specific, defined timeframe, typically the accounting year.
• Cost Principle: assets should initially be recorded at their original cost of acquisition.
• Full Disclosure Principle: businesses or entities must disclose all pertinent and essential information, offering stakeholders and investors complete transparency.
• Going Concern Principle: this assumes that a company will continue its operations, fulfilling its plans throughout and beyond the next financial year, and leveraging its assets to meet its financial commitments.
• Matching Principle: expenses should be recognised in the same accounting period as the revenues they helped to generate.
• Revenue Recognition Principle: all revenue should be recognised in the period it was earned, irrespective of when payments were actually received.

Also discussed are the principles of regularity, consistency, sincerity, permanent of methods, non-compensation, prudence, continuity, periodicity, and full disclosure/materiality.

All of these are present within the various FRS in terms of logic and intent, although because they are practices only noted specifically within the US and not the UK, they are not specifically called out.

For example, the cost principle is the default treatment for most assets in FRS 102.

The principle of non-compensation is recognised in FRS 102, which states that assets and liabilities and income and expenses must not be offset, except where specifically permitted (e.g. tax or certain financial instruments).

How does UK GAAP differ from US GAAP?

GAAP stands for Generally Accepted Accounting Practice in the UK and Generally Accepted Accounting Principles in the US, although the meaning is broadly the same.

In the US, Certified Public Accountants (CPAs) must follow GAAP—the standard framework set by the Financial Accounting Standards Board (FASB)—when working with publicly traded companies.

Many private companies also choose to follow it.

Specific GAAP standards vary between US jurisdictions, but typically require basic compliance in the following three categories:

• general assumptions.
• rules or principles.
• constraints or restrictions.

For more information, see our article about US GAAP on Sage Advice US.

What is UK GAAP SORP?

Statements of Recommended Practice (SORPs) are recommendations for financial reporting that help those within specific industries.

They exist to address the unique reporting challenges faced by certain sectors where the general FRS may not adequately address specific operational or regulatory issues.

They’re not formal standards but provide detailed guidance on terminology and presentation, and provide industry-specific notes.

In some industries, the regulator—like the Charity Commission for England and Wales—requires the use of specific SORPs.

They might even be specified by legislation covering that industry.

The industries that use SORPs are:

• Charities.
• Further and Higher Education.
• Registered providers of social housing.
• Authorised funds.
• Investment trust companies and venture capital trusts.
• Limited liability partnerships.
• Pension schemes.

What’s the difference between the UK GAAP FRS and IFRS?

UK GAAP, particularly FRS 102, is broadly based on the IFRS for SMEs, with the FRS receiving UK-specific edits such as compliance with the Companies Act 2006, along with changes following feedback collected by the FRC from UK and Ireland businesses.

 The UK-adopted IFRS refers to the full International Financial Reporting Standards as endorsed for use in the UK, and it applies primarily to publicly listed and internationally oriented businesses.

It is distinct from the aforementioned IFRS for SMEs, which is not adopted directly for general use in the UK.

The UK-adopted IFRS is broader and wide-ranging than the FRS, and best for international businesses. Therefore, it is more complex and expensive to implement.

A business growing year-on-year following its incorporation may well start out using FRS 105 (Micro Entities), then switch to FRS 102 Section 1A reduced disclosure regime for small entities, then move to the full FRS 102, before using UK-adopted IFRS when they enter international markets and/or list on the stock exchange.

Final thoughts

Ensuring your business follows UK GAAP correctly is not just important. It’s a legal requirement if you’re an incorporated business.

Therefore, spending time getting it right is vital.

Choosing the right FRS or IFRS can help you avoid costly audit requirements your business doesn’t need to meet.

If in doubt seek the help of an expert accountant or tax adviser.