IFRS vs UK GAAP

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

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:

1. Identify the contract with the customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to performance obligations
5. Recognise revenue when (or as) each performance obligation is satisfied

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

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:

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.

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

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.

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:

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).