Accounting Policies Definition, Examples

In the past, different views of the role of financial reporting made it difficult to encourage convergence of accounting standards. Now, however, there appears to be a growing international consensus that financial reporting should provide high quality financial information that is comparable, consistent and transparent, in order to serve the needs of investors.

GAAP as an expense in the period that the related employee services are rendered. IAS 19 requires prior service cost related to retirees and active vested employees to be expensed, whereas U.S. GAAP requires that prior service cost be amortized over the expected service life of existing employees. IFRS is more principles-based while on the other hand GAAP is a more rules-based approach. The policy should be determined by applying a standard or interpretation such that it specifically applies to the transaction or condition. Credit SalesCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment.

All of the policies in the company are very information therefore, management at all level have to understand and need to train their staff to understand as well. This normally includes the criteria in which the company could recognize its revenue and amount to be recognized. It helps us understand how a company can use different accounting policies to use its earnings to its benefit. Under the FIFO method, when a company sells goods, the cost of inventory that is procured first is recorded on its books, whereas for LIFO, the cost of inventory procured most recently is recorded as cost of goods sold.

Changes In Accounting Policies

The Technical Committee then is expected to develop and circulate to IOSCO’s membership a resolution regarding the IASC standards. Maintaining the current reconciliation requirements in all respects. Providing an effective and timely disciplinary process when individuals or firms have not complied with applicable firm or professional standards. Accounting Policies.Change any accounting policies, except as permitted by GAAP. If the company changes its approach from aggressive to conservative or from conservative to aggressive, it should be mentioned and also why it has been changing its approach for the protection of the interests of the investors.

This globalization of the securities markets has challenged securities regulators around the world to adapt to meet the needs of market participants while maintaining the current high levels of investor protection and market integrity. Accounting PrinciplesAccounting principles are the set guidelines and rules issued by accounting standards like GAAP and IFRS for the companies to follow while recording and presenting the financial information in the books of accounts. The nature of accounting policy is not objective but subjective. There is no exhaustive list of all the accounting policies available which can be applied in every circumstance. Companies choose alternative methods of policies as per their individual circumstance which is acceptable; this is majorly driven by a lot of research and judgment by the management of the company.

The Organizational Structure Of A Company

Aggressive policies tend to employ accounting policies in a way such that they overstate the performance in earlier years, and it leads to a decline in a company’s performance in later years . 52 The core standards work program exclude specialized industry standards, such as the banking, insurance, or motion picture industries. Specialized industry accounting issues are expected to be treated as suspense issues. 33 We have stated that “…principles, standards and practices promulgated by the FASB… will be considered by the Commission as having substantial authoritative support….” See SEC Accounting Series Releases No. 4 and 150, codified in section 100 of the SEC’s Financial Reporting Policies . 7 See the discussion of the elements of quality control of an audit firm’s practice in Statement of Quality Control standard section 20.07, published by the American Institute of Certified Public Accountants’ (AICPA’s) Auditing Standards Board. Examples of other areas identified in the comparative analyses that illustrate the provision of alternatives within IASC standards, U.S.

accounting policy example

Identical accounting among enterprises applying the IASC standard or among enterprises applying U.S. GAAP or between those applying the IASC standard and those applying U.S.

GAAP results from different objectives and processes, a qualitative assessment of the positive or negative impact of differences depends on the context in which the standards are intended to be applied. For purposes of the project, the U.S. capital market was chosen as the appropriate context for assessing the differences between IASC standards and U.S. GAAP. A similar project undertaken in a different country likely would make its comparison in the context of that country’s capital market. The International Accounting Standards Committee is a private sector body whose membership includes all the professional accountancy bodies that are members of the International Federation of Accountants . The IASC has the dual objectives of formulating international accounting standards and promoting their acceptance and observance; and working generally for improvement and harmonization of accounting standards. In many jurisdictions, including the United States, accountants and auditors are trained and tested in their domestic accounting standards, but do not receive training in IASC standards. For that reason, accountants and auditors around the world will need to develop expertise with IASC standards to support rigorous interpretation and application of these standards.

Significant Accounting Policies In Financial Statements

Other examples of areas in which one standard provides guidance but the other does not follow. IAS 7 permits a choice of classifying dividends and interest paid or received as operating cash flows or interest or dividends paid as financing cash flows and interest or dividends received as investing cash flows. Statement 95 requires that the interest paid and dividends received be classified as operating cash flows and that dividends paid be classified as financing cash flows. U.S. GAAP requires recognition of a minimum liability on the balance sheet equal to at least the unfunded accumulated pension benefit obligation. The U.S. GAAP distinction between sales and secured borrowings is different from that in IAS 39. As a result, more asset transfers would qualify for sale accounting treatment under IAS 39 than would qualify for sale accounting treatment under U.S. IAS 32 requires that the issuer of a financial instrument that contains both a liability and an equity element classify the instrument’s component parts separately.

Thus, the financial statements of an enterprise with development costs following IASC standards would not be comparable to those of an identical enterprise following U.S. GAAP. Using IASC standards, the enterprise would report higher income in the year that development costs are incurred and lower income in subsequent years than it would if it accounted for the same costs under U.S.

Conservative Vs Aggressive Policies

In public corporate finance, a critical accounting policy is a policy of a firm or industry which is considered to have a notably high subjective element, and that has a material impact on the organization’s financial statements. Such policies are often mandated to be described in detail in specific sections of a company’s annual or quarterly reports. Adopting specific accounting policies and procedures is one method organization’s use to ensure adequate controls and transparency in financial reporting, to minimize the risk of fraud. A company’s choice of accounting policies tells a great deal about its reported earnings; it hints whether management is aggressive or conservative in its approach of reporting the earning. This can be very helpful for investors while they are reviewing the company’s financial position. But the company should be consistent in its accounting policies and should not change the policies they are following since the onset until it is required by an act, standard or the change is such that it is necessary to give a fair view of the company’s financial affairs.

What does retrospectively mean in accounting?

Retrospective means Implementation new accounting policies for transaction, event, or other circumstances as if it had been implemented. In other words, retrospective will effect presentation of financial statements for previous periods.

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. Sometimes when R&D expenses have specific future benefits, it can be capitalized.

Activities For Accounting Inventory

Comparisons may be affected for a single reporting period or over a number of reporting periods. With the exception of the few instances in which an item may be required to be recognized under one set of standards but never recognized under the other, the effects of many of the differences described above and illustrated in the next section will eventually vanish. That is, if, for example, one standard requires a cost to be expensed whereas the other requires the same cost to be amortized over a specified period, comparability in the reporting periods in which the cost is initially recognized and subsequently amortized will be hindered. However, once the cost is fully amortized, the effect on the financial statements of the difference in accounting for that cost will disappear. As a result, a particular difference in requirements might create more than one type of difference in reported results. For example, different recognition criteria might not only result in differences in how an item is recognized , but also might impact the period or periods in which that item is recognized. For that reason, actual differences identified in the comparative analysis may overlap in the five categories of differences described above.

GAAP predisposed to the view that the shortest route to understanding comparability would be to zero in on differences. Therefore, this report, by its very nature, focuses on differences as a basis for comparison. Similarities tend to be identified and described in a general manner, while differences are discussed in more detail.

  • And secondly, when the revenue is recognized – at the time of making the credit sales or at the time of receiving cash.
  • GAAP, nor would they be comparable to the financial statements of an enterprise following IASC standards that chose not to revalue its assets.
  • Businesses that want to stay viable in their industry periodically review and update their corporate accounting policies and procedures as needed.
  • IAS 19 requires prior service cost related to retirees and active vested employees to be expensed, whereas U.S.
  • Many accounting policies necessarily involve the subjective valuation of different items in order to give observers the best possible “snapshot” of a company’s finances by looking at a single balance sheet or profit and loss statement.
  • Q.21 What has been your experience with the quality and usefulness of the information included in U.S.
  • One example of that type of difference between IASC standards and U.S.

Otherwise, significant noncomparability can result between the primary segments identified under IAS 14 and the operating segments identified under Statement 131. GAAP-based financial statements may be hindered if one standard explicitly permits a choice among alternative approaches for a particular topic and the other requires a single approach that is somewhat like one of the alternatives or also permits a similar choice of approaches. Such alternatives may relate to recognition, measurement, display, or disclosure requirements.

Such changes may be required as a result of changes in IFRS or may be applied voluntarily by the management. According to International Accounting Standards 8, accounting policies are conventions, rules, procedures, principles, bases, and even practices.

accounting policy example

Or example, by using a perpetual inventories system or periodic inventories system. If the perpetual is use, inventories have to could continuously and randomly.

If an enterprise determines that compliance with one or more IASC standards would result in the selection and application of an accounting policy that would result in misleading financial statements, it must depart from the IASC standard and select an alternative accounting policy. However, while the requirements for departure from standards may appear similar between the IASC approach and U.S. approach to achieving fair presentation, the application may differ due to conceptual differences between the two approaches. Over the years, we have realized that foreign companies make their decisions about whether to offer or list securities in the United States for a variety of economic, financial, political, cultural and other reasons.

Along with determining the various methods for valuing inventory or asset depreciation, corporate accounting policies also include the procedures personnel must follow to maintain the company’s financial records. The people who keep track of financial activity typically include accountants or bookkeepers who work under the guidance of an accounting manager, controller or business owner. The accounting policy manual includes step-by-step procedures that ensure each of the company’s accounting policies is maintained. The accounting policy and procedure manual, for example, defines the persons or people authorized to sign checks, the procedures to make bank deposits that include checks, wire transfers, credit card disbursements or cash and when and how payroll is managed. 12 In addition to exchange and Nasdaq traded securities, which are required to be registered, the securities of many unregistered foreign issuers trade in the over-the-counter markets in the United States. Unregistered companies are not required to file periodic reports with the Commission or reconcile their financial statements to U.S. generally accepted accounting principles. That should be the basis for assessing the acceptability of IASC standards for use in cross-border securities listings in the United States.

For example, the revenue is recognized only when the goods are receipt by the customer. In this case, the evidence to support revenue recognition in the financial statements would be a delivery note that signed receipted by the customers. Accounting policies might be different from one company to another; however, those policies are tailor to meet the specific International Accounting Standard or other standard bodies like local standards or regulations related to the purpose of financial reporting. Aggressive accounting policies can also raise a red flag from auditors or investors if they feel management is misrepresenting earnings or allocating costs. Conservative accounting policies understate a company’s current financial performance and show better financial performance in subsequent years.


Out of the four reasons mentioned above, disclosure is extremely crucial, as it sets the basis for the policies used in preparing the financial statements and allows the investor to analyze and interpret financial statements with confidence. And the Generally Accepted Accounting Principles are accounting principles that provide guidelines on how companies should prepare financial statements. IFRS is more principles-based and, therefore, can better capture the economics of a certain transaction. 60 The FASB has a project on its agenda to reconsider the existing standards on accounting for business combinations.

accounting policy example

GAAP, the basis for determining whether to include an entity as a subsidiary in the consolidated financial statements is control. However, whereas IAS 27, Consolidated Financial Statements and Accounting for Investments in Subsidiaries, defines control, U.S. pronouncements have focused on ownership of a majority voting interest. Thus, in the United States, preparation of consolidated financial statements primarily has been based on an ownership criterion-majority of the voting interest-rather than on some other criterion to assess the presence of control. U.S. GAAP requires accounting similar to IAS 16’s benchmark treatment and does not permit revaluation accounting for fixed assets. The financial statements of an enterprise choosing to revalue its assets under the IASC standard would not be readily comparable to those of an enterprise following U.S. GAAP, nor would they be comparable to the financial statements of an enterprise following IASC standards that chose not to revalue its assets.


During the process of developing a policy, a company should check for other standards dealing with similar kinds of events and check for the concepts regarding the treatment and meaning of assets, liabilities, income, and expenses in the accounting framework. Apart from this, businesses may also give importance prudence concept which states that gains are not anticipated and are recognized only when they are realized, while provision is created for all anticipated liabilities and losses. Accounting policies are rules and guidelines that are selected by a company for use in preparing and presenting its financial statements.