When operating across the UK and the US, businesses must navigate the differences between UK GAAP (Generally Accepted Accounting Practice in the UK) and US GAAP (Generally Accepted Accounting Principles in the US). While both frameworks aim to provide accurate financial reporting, they have distinct rules and approaches.
1. Principles-Based vs. Rules-Based Approach
One of the fundamental differences is that:
- UK GAAP (FRS 102) follows a principles-based approach, meaning it provides general guidelines and allows professional judgment in financial reporting.
- US GAAP is rules-based, meaning it has detailed and specific regulations that companies must strictly follow.
This difference means that financial reporting under UK GAAP is often more flexible, while US GAAP requires more detailed compliance.
2. Financial Statement Presentation
The structure of financial statements under UK GAAP and US GAAP varies in the following ways:
| Aspect | UK GAAP (FRS 102) | US GAAP |
|---|---|---|
| Primary Statements | Balance Sheet, Profit & Loss, Cash Flow, and Statement of Changes in Equity | Similar structure, but more prescriptive formats |
| Statement Terminology | “Profit & Loss Account” | “Income Statement” |
| Balance Sheet Format | Companies can choose between net assets format and current/non-current format | Requires current/non-current presentation |
| Extraordinary Items | Permitted if they meet criteria | Not allowed |
One of the biggest differences is that extraordinary items (such as one-time large expenses) can be separately reported under UK GAAP, while US GAAP does not allow them to be classified this way.
3. Revenue Recognition
The UK adopted IFRS 15 for revenue recognition under UK GAAP, which aligns it closely with international standards. However, US GAAP has stricter revenue recognition rules under ASC 606.
Key Differences:
- UK GAAP (FRS 102): Revenue is recognised when it is probable that economic benefits will flow to the company.
- US GAAP (ASC 606): Uses a five-step model that requires identifying contracts, performance obligations, and transaction pricing before revenue recognition.
For businesses operating in both the US and UK, this means revenue may be recognised at different times depending on the accounting standard used.
4. Lease Accounting
Lease accounting has undergone significant changes, particularly with the adoption of IFRS 16 in the UK and ASC 842 in the US.
| Aspect | UK GAAP (FRS 102) | US GAAP (ASC 842) |
|---|---|---|
| Operating Leases | Kept off-balance sheet unless substantial risk is transferred | Most leases must be recorded on the balance sheet |
| Finance Leases | Recorded on the balance sheet | Recorded on the balance sheet |
Under US GAAP, all leases longer than 12 months must be recorded on the balance sheet, while UK GAAP still allows for some operating leases to remain off the balance sheet.
5. Inventory Valuation
Inventory valuation methods also differ:
- UK GAAP: Companies can use FIFO (First-In, First-Out) or Weighted Average Cost. LIFO (Last-In, First-Out) is not permitted.
- US GAAP: Companies can choose FIFO, Weighted Average Cost, or LIFO.
Since LIFO is allowed under US GAAP but not under UK GAAP, companies using this method in the US must adjust inventory calculations when consolidating financial statements in the UK.
6. Goodwill and Intangible Assets
Treatment of goodwill and intangible assets is another key area of difference:
- UK GAAP: Goodwill must be amortised over a useful life (usually up to 10 years).
- US GAAP: Goodwill is not amortised but instead tested for impairment annually.
This means that under US GAAP, goodwill can remain on the balance sheet indefinitely unless impaired, while UK GAAP requires systematic amortisation.
7. Tax Accounting Differences
Both UK GAAP and US GAAP have specific tax accounting requirements:
- Deferred tax liabilities:
- Under UK GAAP, deferred tax is calculated based on the timing differences approach.
- Under US GAAP, it is calculated using the temporary differences approach.
- Recognition of tax benefits:
- US GAAP has strict rules on recognising tax benefits from losses (e.g., requiring “more likely than not” criteria).
- UK GAAP provides more flexibility in recognising deferred tax assets.
Companies operating in both regions need to carefully align tax accounting policies to avoid inconsistencies in tax reporting.
Conclusion: Which Standard Should You Use?
For companies operating in both the UK and the US, differences in revenue recognition, leases, goodwill, and tax accounting can create complexities in financial consolidation.
- If your company is UK-based, UK GAAP (FRS 102) is simpler and aligns more closely with IFRS.
- If your company is US-based or operates in the US market, US GAAP is mandatory for SEC reporting and compliance.
For multinational companies, using financial consolidation software can help bridge the differences and ensure consistent reporting across both standards.