Accounting Policy

Accounting standards often allow some choice or require judgment in how they are applied. A company's accounting policies set out the approach it has chosen.

Examples include which inventory costing method to use, such as FIFO or weighted average; how to depreciate property, plant and equipment; when to recognise revenue from long-term contracts; whether to measure investment property at cost or fair value, where permitted; and how to treat development costs.

For example, one company might depreciate its equipment over ten years using the straight-line method, while a competitor uses eight years. Their profits could differ partly because of these policy choices.

Companies must describe their significant accounting policies in the notes to their financial statements, so readers can understand and compare their results.

Accounting policies should be applied consistently from year to year. A company may change a policy only if a new standard requires it or if the change gives more reliable and relevant information. When it does, it usually applies the new policy to earlier periods as well, restating comparative figures so trends remain meaningful.