Generally accepted accounting practice is now defined in
ICTA88/S836A to mean generally accepted accounting practice with
respect to accounts of UK companies that are intended to give a
true and fair view. The same definition applies to individuals,
entities that are not companies and companies which are not UK
This definition means that GAAP is specified to be UK GAAP. It is not the GAAP relevant to another country.
GAAP has no statutory or regulatory definition in the UK (unlike in USA). GAAP encompasses more than just the accounting principles contained in the accounting standards. It extends to the requirement of the Companies Act and the Stock Exchange as well as other acceptable accounting and industry treatments not contained in official literature. UITF Abstracts are not ‘applicable accounting standards’ within the Companies Act but are nonetheless part of GAAP and are meant to be observed unless to do so would depart from the true and fair view.
Section 226 Companies Act 1985 specifies that the directors of
every company have to prepare a balance sheet and a profit and loss
account every financial year and that
the balance sheet shall give a true and fair view
of the state of affairs of the company as at the end of the
financial year, and
the profit and loss account shall give a true and
fair view of the profit or loss of the company for the
The Companies Act 1989 gave the first UK statutory recognition to the existence of accounting standards. It inserted a new Section 256 in the Companies Act 1985, and a new disclosure requirement in Schedule 4 to that Act. ‘Accounting standards’ are defined as statements of standard accounting practice issued by prescribed bodies; accounting standards applicable to a company’s accounts are those which are relevant to a company’s circumstances and to the accounts. Schedule 4, paragraph 36A, requires companies to state by way of note whether the accounts have been prepared in accordance with applicable standards and particulars of and reasons for any material departures. (There is an exception for small and medium sized companies and certain small and medium sized groups).
The Accounting Standards Board is the prescribed standard setting body for the purposes of Section 256. It explains the relationship between accounting standards and true and fair view as:
‘Accounting standards are authoritative statements of how particular types of transaction and other events should be reflected in financial statements and accordingly compliance with accounting standards will be necessary for financial statements to give a true and fair view’.
Because the standards are formulated with the objective of ensuring that information resulting from their application faithfully represents the underlying commercial activity the Board envisages that only in exceptional circumstances will departure from the requirement of a standard be necessary in order to ensure a true and fair view. The true and fair view has the ultimate legal override, primarily because of the Fourth EC Directives.
The statutory definition of GAAP was introduced in FA02.
In many tax cases judges were looking to see if the profits were computed in accordance with normal commercial principles as the first step in ascertaining the full amount of profits. So they were looking at what accountants would do in practice. Accounting standards are a relatively recent development, first being issued in January 1971. It is only after this that accounting standards would be relevant to what constituted generally accepted accounting practice.
The recent Court of Appeal decision in Britax International GmbH v CIR, TL3666, was yet another case where the courts were looking at general principles of accountancy and how this interacted with the computation of taxable profits. Parker, LJ said:
I think that in deference to the arguments of Mr Watson and Mr Medd and to the authorities which were cited I ought to say a few words by way of explanation of the time-honoured expression ‘ordinary principles of commercial accountancy’. The concern of the court in this connection is to ascertain the true profit of the taxpayer. That and nothing else, apart from express statutory adjustments, is the subject of taxation in respect of a trade. In so ascertaining the true profit of a trade the court applies the correct principles of the prevailing system of commercial accountancy. I use the word ‘correct’ deliberately. In order to ascertain what are the correct principles it has recourse to the evidence of accountants. That evidence is conclusive on the practice of accountants in the sense of the principles on which accountants act in practice. That is a question of pure fact, but the court itself has to make a final decision as to whether that practice corresponds to the correct principles of commercial accountancy. No doubt in the vast proportion of cases the court will agree with the accountants but it will not necessarily do so. Again, there may be a divergency of view between the accountants, or there may be alternative principles, none of which can be said to be incorrect, or, of course, there may be no accountancy evidence at all. The cases illustrate these various points. At the end of the day the court must determine what is the correct principle of commercial accountancy to be applied. Having done so, it will ascertain the true profit of the trade according to that principle, and the profit so ascertained is the subject of taxation. The expression ‘ordinary principles of commercial accountancy’ is, as I understand it, employed to denote what is involved in this composite process. Properly understood it presents no difficulty, and I would not be at all disposed to attempt any alternative label.