Accounting Policies (Copy)

What Are Accounting Policies?

• Accounting policies refer to the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.
• They ensure that accounting information is accurate, consistent, and comparable.
• Influenced by International Accounting Standards (IAS/IFRS) to promote uniformity worldwide.

Influence of International Accounting Standards

• Ensure that financial statements are:
  • Globally consistent
  • Transparent and comparable
  • Reliable for investors, governments, and auditors
• Businesses are required to follow IAS/IFRS when preparing financial statements (where applicable), especially in international contexts.

Example:

• Inventory valuation methods (e.g., FIFO) are accepted under IFRS but not LIFO.

Objectives in Selecting Accounting Policies

1. Comparability

• Allows users to compare financial statements across different years and firms.
• Requires:
  • Consistent application of accounting methods over time
  • Disclosure of changes in policy (with reasons)

Example:

• If one year uses straight-line depreciation and another uses reducing balance, profits may seem artificially higher or lower — comparison becomes unreliable.

2. Relevance

• Information must help users make decisions.
• Only include information that can influence economic decisions of users.

Example:

• Including data about discontinued operations helps investors decide whether to hold or sell shares.

3. Reliability

• Information must be:
  • Accurate
  • Free from bias
  • Faithfully represented
• Accounting policies should faithfully reflect the actual situation.

Example:

• A bad debt provision should be based on actual history of defaults, not optimism.

4. Understandability

• Financial information should be clear and easy to interpret.
• Should avoid unnecessary complexity or jargon.
• Policies should be disclosed in the notes to accounts for transparency.

Example:

• Explaining depreciation policy in plain language (e.g., 10% straight-line annually) makes it easy for stakeholders to understand.