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
companies.
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
financial year.
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.
