What are accounting policies?
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. This article contains some useful information for your IFRS studies.
Selection and application of accounting policies
Under IAS 8 Accounting policies, changes in accounting estimates and errors, the requirements for choosing an accounting policy is as follows:
- If there is an accounting standard or interpretation governing a transaction or event, the accounting policy chosen should comply with the standard or interpretation.
- Management should use their judgement, in accordance with the conceptual framework, for chosing an accounting policy for any transactions or events which are not covered by an accounting standard or interpretation.
The IASB Framework is not an accounting standard itself. If there is any conflict between an accounting standard and the Framework, the accounting standard should be followed.
If management judgement is used to select an accounting policy, the financial information resulting from the accounting policy must be:
- relevant to the needs of the users of the financial statements, and
- reliable
In making a judgement about the selection of an accounting policy, management should refer to the following, in the following order, and consider whether or not they are applicable:
- the requirements of accounting standards or guidance from Interpretations dealing with similar and related issues
- definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the IASB Conceptual Framework.
Other standard setting bodies may be referenced, but only to the extent they do not conflict with International Financial Reporting Standards, their interpretations or the IASB conceptual framework.
Consistency of accounting policies
An entity should select and apply its accounting policies consistently for similar transactions, events or conditions, unless an accounting standard requires or permits different accounting policies or categorisation of the items.
Changes in accounting policies
Under IAS 8, a change in accounting policy is permitted only when:
- a change in policy is required by an accounting standard or Interpretation, or
- a change in accounting policy will result in reliable and more relevant financial information.
A change in an accounting policy is dealt with retrospectively, so the accounts of previous years are amended to show the financial information as if the entity had always followed the new policy.
Accounting policies and comparability
To compare the financial statements of different entities and the financial statements of the same entity over time, users need information about the accounting policies used by the entity.
They also need information about any changes to accounting policies and the effects of those changes.
IAS 8 discourages changes to accounting policies, and frequent changes are pretty much prohibited.
However, if a change in accounting policy would improve the comparability of the financial statements, and provide more useful information than the current policy, this should be used.