If you are a limited company you must legally prepare financial documents that meet a certain standard.
And while you may think that’s all down to your accountant, directors need to ensure the company is operating correctly. Failing to do so could lead to problems for directors!
Whether you’re thinking about setting up a business, turning your LLP to an incorporated company or just want to know more, this blog will explain all you need to know.
In the UK, business and organisations that are incorporated must legally prepare financial documents to UK GAAP (Generally Accepted Accounting Practice) standards. An incorporated business or organisation includes:
- Private companies limited by shares.
- Private companies limited by guarantee.
- Private unlimited companies.
- Public limited company.
They must adhere to these standards as it helps to reduce the risk of misleading financial reporting.
What are GAAP standards?
The GAPP standards are a set of standardised principles that any incorporated business in the UK must follow when preparing financial documents. They must follow them in everyday accounting, too.
Meeting these standards is necessary unless the company has chosen to report using UK IFRS (International Financial Reporting Standards) instead. Public limited companies – or PLCs – such as M&S must use UK IFRS rather than GAAP standards.
Companies have to provide a ‘true and fair view’ of assets, their financial position, liabilities and profit or loss to be compliant with GAAP standards. And they should file accounts with Companies House. They must also meet disclosure requirements, which includes a balance sheet or disclosure of the company’s assets.
GAAP standards affect all activities carried out by anyone in your business that carries out financial activities. This includes how they measure and report economic activity and disclose information about that activity.
UK businesses that are incorporated are legally required to prepare financial statements that give a true and fair view of the company. This comes under the Companies Act 2006. The company must adopt either UK GAAP or IFRS standards.
What do directors need to know?
Company directors should ensure the appropriate financial reporting standards are in place. The directors of any company that do not could be held liable for breaches of directors’ duties.
These duties are part of the Companies Act 2026 and anyone who fails to observe them could face court action. HMRC could also impose penalties, while Companies House may reject the company’s accounts.
Different standards for different sizes
Although GAAP standards must be met for UK-based incorporated companies, the size and needs of the business governs the different FRS (Financial Reporting Standards) principles they are required to meet.
This basically means that, in theory, smaller the business report simpler company accounts. The company threshold sizes changed in April 2025, and we explained the changes in a blog post.
SMEs in the UK must choose between four annual accounting and reporting regimes:
- FRS 101
- FRS 102
- FRS 102 1A
- FRS 105
Directors must choose the appropriate regime based on the company’s size and needs.
Choosing the right FRS for your business
While it might appear to be confusing and frustrating having to choose your own Financial Reporting Standards (FRS), there’s a reason for the different levels.
If you are a ‘mico-entity’ with just a few employees, you shouldn’t need to meet the same level of reporting requirements as a big PLC. As well as financial reporting being more complex for large companies, small businesses are less likely to employ staff with the in-depth financial and accountancy knowledge required. That’s because the cost of employing someone with those qualifications and skills would be high for a smaller entity.
Most medium and large companies tend to use FRS 102 standards. Although some qualify for simpler regimes, including FRS 105 and FRS 102 1A.
FRS 105
Companies employing an average of 10 people that have a turnover less than £632,000 with a balance sheet total of less than £316,000 meet FRS 105 standards.
FRS 102 1A
This regime are the standards required by companies that turnover less than £10.2 million. They should have a balance sheet total less than £5.1 million and have an average 50 employees.
Accountants can advise you to ensure you choose the correct regime. We can help our clients do that.
How to I stay compliant with GAAP?
The FRS requirements under the UK GAAP standards are quite complex. That means you will need expert advice from an accountant. Overall, and in simple terms, directors must ensure they:
- Complete the required set of financial statements.
- Recognise and measure the company’s assets, liabilities, income and expenses.
- Meet disclose requirements (such as a description of accounting policies).
- Keep accounting records and supporting evidence.
- Stay legally compliant.
- File with Companies House.
What to do next?
If you have been a director of an incorporated company for some time, you should meet these requirements. But if you’re new to a company, are setting up a business or want advice, contact us today.
