Generally Accepted Accounting Practices (GAAP UK) Explained

Generally Accepted Accounting Practices in the UK (or GAAP UK for short) refer to the comprehensive set of rules that govern how company accounts must be prepared in the United Kingdom.

These practices are crucial as they ensure consistency across all company financial reports.

Within the UK there are typically two routes for a company, in regards to the accounting standard used, these are

  • UK GAAP, which include Financial Reporting Standards (FRS) issued by the Financial Reporting Council (FRC)
  • And International Financial Reporting Standards, commonly called IFRS

According to UK Accounting Plus, except where IFRS Accounting Standards are mandated, UK companies may opt to prepare their financial statements in accordance with either UK GAAP or IFRS Accounting Standards.

In this article, we will explore the Financial Reporting Standards, specifically FRS102, which sets the standards applicable in both the UK and Republic of Ireland.

For Quantity Surveyors, understanding FRS102 is essential, as the financial reporting conducted on construction projects must align with these accounting standards.

We will cover three key concepts within FRS102 that are particularly relevant for Quantity Surveyors, as they come into play in financial reporting through Value of Work Done (VOWD) and Cost Value Reconciliations (CVRs). These are:

  1. Recognised Revenue
  2. Recognised Expense
  3. And Prudence

Recognised Revenue

This is the point at which a business recognises revenue in its financial reports. Under FRS102, revenue on construction contracts is recognised according to the percentage of completion. Crowe specifies that revenue is recognised when the outcome of a contract can be measured reliably, accounting for both income and costs proportionally. If the outcome is uncertain, all costs are expensed, and revenue is recognised only to the extent that it is likely costs will be recoverable.

Recognised Expense

According to FRS102, any costs not likely to be recovered should be recognised as an expense immediately.

When the outcome of a construction contract is uncertain:

  • Revenue is only recognised to the extent of recoverable contract costs.
  • All contract costs are recognised as an expense in the period they are incurred.

Expected losses on a contract, should be immediately reflected as expenses in the financial report. Let’s say you’re working on a target cost contract where you know the project will incur a pain share, the pain share applicable to that period would need to be reflected in the financial report, as it is an expected loss.

Prudence Concept

Levitt Walmsley Associates says financial statements will always contain a degree of judgement and estimation and prudence is the exercise of caution where such judgements and estimations are concerned.  By exercising prudence, assets and income will not be overstated and conversely liabilities and expenses will not be understated.

The prudence concept ensures we avoid presenting a misleadingly optimistic view of a project’s financial situation.

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