UK businesses prepare their financial statements under one of two frameworks: UK GAAP (principally FRS 102) or IFRS (International Financial Reporting Standards). Listed companies must use IFRS for their consolidated accounts, while most private companies use FRS 102. Understanding the differences between these frameworks is essential for directors, accountants and investors.
For a full overview of which standards apply to which entities, see our guide to UK accounting standards.
Who uses which framework
| Entity type | Framework | Basis |
|---|---|---|
| UK-listed company (consolidated accounts) | IFRS | Mandatory (EU-adopted IFRS, now UK-adopted IFRS) |
| AIM-listed company | IFRS or FRS 102 | Choice (many use IFRS voluntarily) |
| Large private company | FRS 102 (or IFRS voluntarily) | Most use FRS 102 |
| Medium private company | FRS 102 | Standard choice |
| Small private company | FRS 102 Section 1A | Reduced disclosures |
| Micro-entity | FRS 105 | Most simplified option |
| Subsidiary of IFRS group (individual accounts) | FRS 101 or FRS 102 | FRS 101 uses IFRS recognition with reduced disclosures |
UK-adopted IFRS replaced EU-adopted IFRS following Brexit. The UK Endorsement Board now has responsibility for adopting new or amended IFRS standards for use in the UK. In practice, the standards remain substantially aligned with those issued by the IASB.
Revenue recognition
This is one of the most significant areas of difference.
FRS 102 (Section 23)
FRS 102 uses a risks and rewards model. Revenue from the sale of goods is recognised when:
- Significant risks and rewards of ownership transfer to the buyer
- The seller retains no continuing involvement or control
- The amount of revenue can be measured reliably
- It is probable that economic benefits will flow to the entity
Revenue from services is recognised by reference to the stage of completion at the reporting date.
IFRS 15
IFRS 15 uses a five-step model based on performance obligations:
- Identify the contract with the customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to performance obligations
- Recognise revenue when (or as) each performance obligation is satisfied
| Feature | FRS 102 | IFRS 15 |
|---|---|---|
| Core model | Risks and rewards | Performance obligations |
| Multiple deliverables | Limited guidance | Detailed allocation rules |
| Variable consideration | Recognised when reliably measurable | Estimated and constrained |
| Contract modifications | Limited guidance | Specific rules |
| Disclosure requirements | Moderate | Extensive |
The IFRS 15 model can produce materially different revenue timing, particularly for entities with complex contracts, bundled products or variable pricing.
Leases
FRS 102 (Section 20)
FRS 102 maintains the traditional finance lease vs operating lease distinction:
- Finance leases (substantially all risks and rewards transfer) are capitalised on the balance sheet
- Operating leases are expensed on a straight-line basis over the lease term
IFRS 16
IFRS 16 eliminated the operating lease classification for lessees. Almost all leases are now recognised on the balance sheet:
- Lessees recognise a right-of-use asset and a corresponding lease liability
- The asset is depreciated, and the liability is unwound using an effective interest rate
- Short-term leases (12 months or less) and low-value leases are exempt
| Feature | FRS 102 | IFRS 16 |
|---|---|---|
| Lessee balance sheet | Finance leases only | Nearly all leases |
| Operating leases | Off balance sheet | On balance sheet (with limited exceptions) |
| Expense pattern | Straight-line rental expense | Depreciation + interest (front-loaded) |
| Impact on EBITDA | No effect | EBITDA increases (rent reclassified) |
| Lessor accounting | Finance/operating distinction | Finance/operating distinction (unchanged) |
The shift to IFRS 16 typically increases reported total assets and total liabilities, improves EBITDA (because rent is replaced by depreciation and interest) and front-loads the total expense in the early years of a lease.
Financial instruments
FRS 102 (Sections 11 and 12)
FRS 102 uses a simple two-tier classification:
- Basic instruments (Section 11): measured at amortised cost
- Other instruments (Section 12): measured at fair value through profit or loss
IFRS 9
IFRS 9 classifies financial assets based on the entity’s business model and the contractual cash flow characteristics:
| Category | Measurement | Typical instruments |
|---|---|---|
| Amortised cost | Amortised cost | Loans, receivables held to collect |
| Fair value through OCI | Fair value (changes in OCI) | Debt instruments held to collect and sell |
| Fair value through P&L | Fair value (changes in P&L) | Derivatives, equity investments (unless OCI election) |
IFRS 9 also introduced a forward-looking expected credit loss model for impairment, replacing the incurred loss model. This typically results in earlier recognition of bad debt provisions.
| Feature | FRS 102 | IFRS 9 |
|---|---|---|
| Classification | Basic / Other | Business model + cash flow test |
| Impairment model | Incurred loss | Expected credit loss |
| Hedge accounting | Simplified | More flexible but more complex |
| Fair value option | Limited | Available for financial assets and liabilities |
Goodwill and business combinations
FRS 102 (Section 19)
Under FRS 102, goodwill arising on acquisition is:
- Capitalised as an intangible asset
- Amortised over its estimated useful life (maximum 10 years if not reliably estimable)
- Subject to impairment testing when indicators of impairment exist
IFRS 3 and IAS 38
Under IFRS:
- Goodwill is capitalised but never amortised
- It is tested for impairment annually (and whenever indicators exist)
- The impairment test compares the carrying amount of the cash-generating unit to its recoverable amount
| Feature | FRS 102 | IFRS |
|---|---|---|
| Amortisation | Yes (useful life, max 10 years) | No |
| Impairment testing | When indicators exist | Annual + when indicators exist |
| Negative goodwill | Recognised in P&L immediately | Reassess, then recognise in P&L |
| Acquisition costs | Included in cost of acquisition | Expensed as incurred |
The IFRS approach can result in goodwill remaining on the balance sheet indefinitely at its original amount until an impairment event occurs, while FRS 102 steadily reduces it through amortisation.
Consolidated accounts
Both frameworks require parent companies to prepare consolidated accounts, but there are differences in how subsidiaries, associates and joint arrangements are treated.
| Area | FRS 102 | IFRS |
|---|---|---|
| Control definition | Power to govern financial and operating policies | Power over the investee, exposure to variable returns, ability to use power to affect returns |
| Joint arrangements | Jointly controlled entities, operations, assets | Joint ventures (equity method) and joint operations |
| Associates | Equity method or cost/fair value in individual accounts | Equity method in consolidated accounts |
| Exemptions | Small group exemption | No size-based exemption |
The IFRS definition of control (IFRS 10) is more nuanced and can result in different consolidation outcomes, particularly for structured entities and arrangements where control is exercised without majority voting rights.
Choosing between IFRS and FRS 102
For private companies with a genuine choice, the decision depends on several factors:
| Factor | Favours IFRS | Favours FRS 102 |
|---|---|---|
| International investors or lenders | Yes | – |
| Plans to list on a regulated market | Yes | – |
| Simpler transactions and structures | – | Yes |
| Cost of preparation | Higher | Lower |
| Staff familiarity | IFRS-trained team | FRS 102-trained team |
| Group reporting | Parent uses IFRS | Parent uses FRS 102 |
Most UK private companies use FRS 102 because it is less complex, less costly to apply and provides sufficient information for their stakeholders. Companies planning an IPO or seeking investment from international sources may benefit from adopting IFRS early to avoid a costly transition later.
Transition between frameworks
An entity adopting IFRS for the first time applies IFRS 1, which requires preparing an opening IFRS balance sheet, applying IFRS retrospectively (with certain exemptions) and presenting reconciliations between previous UK GAAP and IFRS figures.
Switching back to FRS 102 is permitted but requires compliance with the transition provisions in Section 35. Companies considering this move should assess the impact on goodwill (which would need to be amortised), lease accounting (which would revert to the finance/operating distinction) and financial instruments (which would be reclassified under the basic/other model).