The Differences Between US GAAP and UK GAAP (#371)
/What are the differences between US GAAP and US GAAP?
FRC vs. FASB
The first difference is that UK GAAP come from the Financial Reporting Council, which is located in London, while US GAAP comes from the Financial Accounting Standards Board, which is based in Norwalk, Connecticut. And as an aside, I’m not sure how long the Financial Reporting Council is going to be around. Back in 2018, an independent review council recommended to the UK government that it be replaced, but nothing ever happened. Since then, there seems to have been quite a bit of dithering within the UK government over how to replace it.
At a high level, UK GAAP is essentially a variation on International Financial Reporting Standards that generally allows for fewer disclosures than are required under IFRS. A bigger business in the UK will typically use IFRS, while a smaller business or a subsidiary of a larger one would use UK GAAP.
Asset Revaluations
A significant difference between the two standards is in the area of asset revaluation on the balance sheet. This is generally not allowed under GAAP, especially for fixed assets. That is not the case under UK GAAP, which follows the IFRS practice of allowing you to revalue assets to their current market values. This does not mean that you have to revalue certain assets under UK GAAP, only that it’s an option. Since revaluations require more accounting work, I generally advise against it.
Interest Capitalization
A potentially large difference involves whether you can capitalize the cost of interest on construction projects. Under US GAAP, you would capitalize this cost. Under UK GAAP, you have the choice of doing that or charging it to expense. I kind of like the UK approach, since there’s less accounting work involved in just charged off interest expense as it’s incurred.
Intangible Asset Treatment
And then there’s a difference between the accounting treatment of intangible assets. Under US GAAP, you have to conduct at least an annual impairment test for any goodwill assets or other intangible assets that have indefinite lives. UK GAAP has the annual impairment test as well, but it also requires some sort of useful life for all intangible assets, without exception, which is usually capped at ten years. This means that impairment testing is less necessary, since the underlying asset is going to be written off over time anyways.
And speaking of impairment testing, there’s another difference. Under US GAAP, you conduct impairment testing using undiscounted cash flows, while UK GAAP mandates the use of discounted cash flows.
Inventory
Another difference is in the inventory area. Under US GAAP, you’re allowed to use last-in, first-out accounting to value your inventory, while it’s not allowed under UK GAAP. Instead, UK GAAP only allows the use of first-in, first-out accounting, or weighted-average accounting. I think the UK GAAP has it right on this, since there’s very little basis in reality for using the LIFO system. Instead, it’s really just an excuse to drive down your reported profits, on the assumption that your inventory cost is increasing over time.
Product Development Costs
And then we have product development costs. Under US GAAP, you nearly always have to charge all development costs to expense as incurred. That’s not the case under UK GAAP, where you can capital these costs, but only if you can prove the technical feasibility and commercial viability of the product, as well as management’s commitment to sell it. This difference can be fairly significant. That being said, you can also elect to just charge off these expenses under UK GAAP, no matter what.
Contingent Liabilities
There’s another difference in the area of contingent liabilities, though it’s really just a change in the wording. Under US GAAP, you recognize a contingent liability when there’s a probable outflow of resources to settle an obligation, and you can reasonably estimate the amount. Under UK GAAP, it’s essentially the same thing, but now it’s called a provision instead of a contingent liability.