IAS 8 Definition: The specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.
Accounting policies are procedures an entity uses to prepare its (consolidated) financial statements. Unlike accounting principles, which are rules, accounting policies are the standards for following those rules and define the fundamental policies that act as the financial reporting framework or basic structure of financial reporting in the financial statements in which these accounting policies are included.
These policies may differ from company to company, but all accounting policies are required to conform to generally accepted accounting principles (GAAP) and/or international financial reporting standards (IFRS).
Example of importance of accounting principles
R&D Expenses – which are capitalized and which are called expenses? This is a significant consideration in financial accounting and a company needs to follow the accounting policy to recognize the expenses or the capitalization. But how it is done? R&D expenses certainly have future benefits. That’s why R&D expenses have been treated as assets rather than expenses. But when a company is expensing R&D, it doesn’t know any specific future benefits. That’s why it can’t be capitalized in most cases. Sometimes when R&D expenses have specific future benefits, it can be capitalized. As per GAAP, one should recognize R&D expenses when they’re incurred.
Following are Examples of accounting policies:
- Valuation of inventory using FIFO, Average Cost or other suitable basis as per IAS 2
- Classification, presentation and measurement of financial assets and liabilities under categories specified under IFRS 9 such as:
- valued at amortised cost
- valued at fair value through other comprehensive income, or
- valued at fair value through profit and loss
- Timing of recognition of assets, liabilities, expenses and income
- Basis of measurement of non-current assets such as historical cost and revaluation basis
- Accrual accouniting of preparation of financial statements
Management must consistently review its accounting policies to ensure they comply with the latest pronouncements by IASCF and that the adopted policies result in presentation of most relevant and reliable financial information for users.