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What are Accounting Policies and Required Disclosures?

Accounting policies are the specific principles, bases, conventions, rules and practices a company applies in preparing its financial statements. IAS 8 requires entities to select policies consistently, disclose them clearly, and explain any changes so users can compare financial statements across periods and companies.

Short answer

Accounting policies are the specific rules an entity uses to prepare its financial statements (e.g. FIFO vs weighted-average inventory costing), and required disclosures are the notes explaining which policies were used, why, and how any changes were applied.

Selecting and disclosing an accounting policy

1
Identify the applicable standard
Check if an IFRS/TFRS specifically addresses the transaction.
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2
Select and apply the policy
If no standard applies directly, use judgment per the IAS 8 hierarchy.
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3
Disclose the policy
State the policy clearly in the notes to the financial statements.
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4
Apply consistently
Use the same policy period to period unless a change is justified and disclosed.

Step-by-step worked examples

A company switches its inventory costing method from FIFO to weighted-average because it better reflects the pattern of consumption of economic benefits. What must it disclose?

Identify this as a voluntary change in accounting policy under IAS 8
Disclose the nature of the change and the reason it provides more reliable, relevant information
Disclose the amount of the adjustment for the current and each prior period presented
Apply the new policy retrospectively, restating prior periods where practicable

A company starts holding cryptocurrency for investment but no IFRS standard directly addresses it. How does it select an accounting policy?

Confirm no standard specifically applies (IAS 8.10)
Refer to the IASB Conceptual Framework and requirements for similar/related issues
Consider recent pronouncements from other standard-setters with a similar framework
Develop and disclose a policy that gives relevant, faithfully represented information

A company revises the useful life of its equipment from 10 years to 7 years based on new usage data. Is this a policy change or something else, and what is disclosed?

Classify this as a change in accounting estimate, not a change in accounting policy
Apply the change prospectively — no restatement of prior periods
Disclose the nature and amount of the change, and its effect on current and future periods

Flashcards

Quick quiz

Q1.Which standard governs the selection and disclosure of accounting policies?

Correct answer: B. IAS 8 covers accounting policies, changes in estimates, and errors.

Q2.A company changes the useful life of a machine based on new information. This is a...

Correct answer: B. Revising an estimate like useful life is a change in accounting estimate, applied prospectively.

Q3.How is a voluntary change in accounting policy usually applied?

Correct answer: C. IAS 8 requires retrospective application for voluntary policy changes, unless impracticable.

Q4.What must accounting policy disclosures allow users to do?

Correct answer: B. Clear, consistent policy disclosure supports comparability, a core qualitative characteristic.

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Common mistakes

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Treating a change in estimate (like useful life) as a change in policy. — Correct: Changes in estimate are applied prospectively; only genuine policy changes are applied retrospectively.

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Changing a policy just because it produces better-looking results. — Correct: A policy change is only justified if it gives more relevant and reliable information, or a standard requires it.

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Omitting the reason for a policy change from the notes. — Correct: IAS 8 requires disclosing the nature of, and reason for, any change in accounting policy.

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Applying a new policy only going forward when retrospective application is required. — Correct: Voluntary policy changes are applied retrospectively unless impracticable to do so.

FAQ

What are accounting policies?

The specific principles, bases and rules a company applies when preparing its financial statements, such as its inventory costing method.

What is the accounting policies disclosure formula for compliance?

There's no numeric formula — compliance means disclosing the policy, the reason for any change, and the financial effect of that change, per IAS 8.

What are examples of accounting policies and disclosures?

Inventory costing method (FIFO vs weighted-average), depreciation method, and revenue recognition timing, each disclosed in the notes.

How are accounting policy changes different from estimate changes?

Policy changes are applied retrospectively and disclosed with restated figures; estimate changes are applied prospectively, only affecting current and future periods.