Consistent frameworks across a group: section 407

Section 407 of the Companies Act 2006 requires the directors of a parent company that prepares group accounts to secure that the individual accounts of the parent and each of its UK subsidiaries are prepared using the same financial reporting framework, unless in their opinion there are good reasons not to. “Framework” here means Companies Act accounts or IAS accounts, so a group mixing FRS 101, FRS 102 and FRS 105 is already consistent. The rule is switched off where no group accounts are prepared, does not force charities into line with non charities, and releases a parent that uses IAS for both its group and individual accounts.

What does section 407 actually say?

Section 407 has five subsections:

1. Subsection (1): the directors of a parent company must secure that the individual accounts of the parent and of each of its subsidiary undertakings are all prepared using the same financial reporting framework, except to the extent that in their opinion there are good reasons for not doing so.
2. Subsection (2): subsection (1) does not apply if the directors do not prepare group accounts for the parent.
3. Subsection (3): subsection (1) only applies to accounts of subsidiary undertakings that are required to be prepared under Part 15 of the Act.
4. Subsection (4): subsection (1) does not require charities to use the same framework as non charities in the group.
5. Subsection (5): subsection (1)(a), the part dealing with the parent’s own accounts, does not apply where the directors prepare IAS group accounts and IAS individual accounts.

The duty sits with the parent’s directors, not with the subsidiary’s board. Section 395(1), which gives each company its choice of framework for individual accounts, is expressly stated to be subject to section 407. The section applies to limited liability partnerships too: the LLP accounts and audit regulations (SI 2008/1911, regulation 10) apply sections 398 to 408 to LLPs with modifications.

What counts as a financial reporting framework?

Section 395(1) offers a company only two types of individual accounts: Companies Act individual accounts prepared under section 396, or IAS individual accounts prepared under UK adopted international accounting standards. Section 407 is about that choice.

FRS 100 confirms in its footnote to paragraph 4 that individual accounts prepared under FRS 101, FRS 102 or FRS 105 are all Companies Act individual accounts under section 395(1)(a), while accounts prepared under adopted IFRS are IAS individual accounts under section 395(1)(b). FRS 101 paragraph 4A makes the same point: FRS 101 accounts are Companies Act accounts and not IAS accounts. So a group where one subsidiary uses FRS 101, another FRS 102 and a dormant one FRS 105 meets section 407 without any appeal to good reasons. Choosing between FRS 101 and FRS 102 is covered in FRS 101 or FRS 102 for a subsidiary.

Section 407 also says nothing about accounting policies. Two FRS 102 subsidiaries with different policies on development costs satisfy section 407; the difference is handled on consolidation under the separate requirement for uniform accounting policies in groups.

Which subsidiaries are caught?

Subsection (3) limits the rule to subsidiary undertakings whose accounts must be prepared under Part 15 of the Act. An overseas subsidiary that is not required to prepare accounts under Part 15 falls outside it, so an Irish or US subsidiary can follow its local rules for its own statutory accounts without affecting the analysis.

Subsection (4) recognises that charities have no choice. Section 395(2) requires a charitable company’s individual accounts to be Companies Act accounts, so a commercial group using IAS accounts for its trading companies does not breach section 407 because its charitable foundation uses Companies Act accounts.

When does the rule not apply at all?

Subsection (2) switches the rule off if the directors do not prepare group accounts for the parent. A parent that is not required to prepare group accounts under section 399, or is entitled to one of the exemptions in sections 400 to 402, and does not prepare them voluntarily, can let each subsidiary choose its framework freely. Our guide to group accounts exemptions explains when a parent need not consolidate.

Where the parent is itself a subsidiary of a larger group, the analysis is done at each level that prepares group accounts. An intermediate parent preparing its own group accounts has the duty for its own sub group.

How does the IAS parent exception in subsection (5) work?

A parent whose securities are admitted to trading on a UK regulated market must prepare IAS group accounts under section 403(1). If its directors also choose IAS for the parent’s individual accounts, subsection (5) disapplies subsection (1)(a). The parent’s accounts no longer need to match the subsidiaries.

Subsection (5) only removes paragraph (a). Paragraph (b), covering each subsidiary undertaking, keeps running, so the subsidiaries are still expected to use the same framework as one another unless there are good reasons. Illustration only. A listed parent prepares IAS group and individual accounts. It has six UK subsidiaries. Five use FRS 101 and one uses IAS individual accounts because it was acquired already reporting under full IFRS. The parent is outside the rule, but the sixth subsidiary is out of line with the other five, so the directors either rely on good reasons for the difference or move that subsidiary to Companies Act accounts.

What are good reasons?

The Act does not define good reasons and leaves the judgement to the opinion of the parent’s directors. Section 407 itself contains no requirement to disclose the reasons in the accounts. In practice directors tend to weigh things such as a planned listing or sale of the subsidiary, a recent acquisition that would face a costly conversion, local regulatory requirements, or the cost of running two frameworks against the benefit of consistency. Recording the reasoning in board minutes gives the auditor and future directors a trail if the choice is questioned.

Moving a subsidiary back into line is not always immediate. Section 395(3) keeps a company on IAS individual accounts after its first IAS year unless there is a relevant change of circumstance, such as becoming a subsidiary of an undertaking that does not prepare IAS individual accounts (section 395(4)(a)). Otherwise, section 395(4A) allows a move to Companies Act accounts only if the company has not made such a change in the five years before the first day of that financial year. The FRS 100 transition paragraphs then govern the accounting; see moving from IFRS back to FRS 102.

How does section 407 fit with the other framework rules?

Section 407 is one of several rules that work together. Section 403 governs the framework for group accounts, section 395 the framework for individual accounts, and FRS 100 decides which UK GAAP standard applies within Companies Act accounts; see FRS 100: which UK GAAP applies and when UK companies must use IFRS for the wider picture.

What mistakes come up most often?

• Treating FRS 101 and FRS 102 as different frameworks. They are both Companies Act accounts for section 407 purposes.
• Reading subsection (5) as a full exemption. It frees the parent’s own accounts, not the subsidiaries from each other.
• Applying the rule to overseas subsidiaries. Subsection (3) limits it to accounts required under Part 15.
• Forgetting the five year rule. A subsidiary on IAS accounts may not be able to move straight to FRS 101 or FRS 102 without a relevant change of circumstance.
• Assuming the subsidiary’s board decides. The duty is on the parent’s directors.

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• SDLT group relief
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• Group Relief for Corporation Tax

Sources

• legislation.gov.uk: Act 2006 c. 46, section 407
• legislation.gov.uk: Act 2006 c. 46, section 395
• legislation.gov.uk: Act 2006 c. 46, section 403
• Financial Reporting Council: FRS 100 September 2024
• Financial Reporting Council: FRS 101 September 2024 lyJ0Tow

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.