Accounting policies

Accounting policies contain the set of guidelines and procedures implemented by a company’s management team to account for transactions and prepare financial information. They cover the moment of recognition, measurement systems and procedures for presenting disclosures.

Having accounting policies and accounting guidelines in place is one thing. Ensuring they are understood and consistently applied across departments, entities and reporting periods is another. In many organisations, policies exist in a formal document that few people actively consult. The result is interpretation differences, inconsistent booking decisions and corrections that surface during closing or audit, not because the policies are wrong, but because they are not accessible in a way that supports daily use.

WHY ACCOUNTING POLICIES ARE NECESSARY

Accounting policies are necessary for several reasons:

Compliance with rules and regulations
In every country, a company must adhere to the rules and regulations issued by the government. Depending on the size of the company (or whether it is listed or not), these rules are usually more or less comprehensive. For example, a listed company in the EU must apply IFRS Accounting Standards as adopted by the EU in its external financial reporting and comply with all the disclosure requirements, whereas small companies may only have to provide a balance sheet based on local Generally Accepted Accounting Principles (GAAP).

Consistency and comparability
In order to allow management and stakeholders to compare the results over time, it is important that the same policies are applied in the periods presented or under review. When companies in the same industry apply the same principles, their results can be compared on a like-for-like basis.

Transparency
A company that discloses its accounting policies provides transparency on the choices it has made in accounting for certain transactions and/or positions. In the absence of an accounting policy, it would not be clear whether the company is presenting information in a generally favourable manner.

Accountability
Having up-to-date accounting policies available ensures that all employees understand how the company operates and prevents excuses for non-compliance. In addition, the company’s external auditor reviews compliance with the company’s accounting policies and reports on any deviations.

WHAT IS THE DIFFERENCE BETWEEN ACCOUNTING POLICIES AND PRINCIPLES

While an accounting principle is the standardised rule established by a governing body, an accounting policy is the method or guideline used by management to comply with the rule and generate financial information.

Example of an Accounting Policy

The accounting policy for property, plant and equipment of a telecom provider may address the following:

Recognition: Items that qualify as telecom network items, for example network cables.

Measurement: Costs that are considered direct costs attributable to the item, for example direct labour costs for installing the network cable.

Subsequent measurement: The depreciation method, the estimated useful life and the residual value,. For example, the network cable that is depreciated using the straight-line method, with an estimated useful life of 10 years and no residual value.

Accounting Policy

Depending on the topic, an accounting policy may need to be quite comprehensive to address all the specifics. It is important that the accounting policy is written in a transparent, clear and understandable way so that it is understood by everyone.

SETTING UP THE ACCOUNTING POLICIES AND COMMUNICATING THEM

Determining accounting policies is the responsibility of a company’s management, specifically the chief financial officer (CFO) and the controller. These individuals should consider factors such as the company’s industry, size, complexity, and the accounting standards that apply to the company when developing accounting policies.

They may also consult with external auditors or other accounting experts to ensure that the policies are appropriate and in line with accounting standards and regulations.

Once established, accounting policies should be documented in a company’s accounting manual. They should be communicated to relevant personnel within the company and reviewed regularly to ensure that they remain appropriate and up to date. Any changes to accounting policies should be carefully considered and documented to ensure transparency and consistency in financial reporting.

ACCOUNTING POLICY DOCUMENTATION

Documenting accounting policies is not enough on its own. Policies need to be written in practical language, connected to real transaction examples and booking instructions, and organised in a way that makes them easy to find at the moment they are needed. Static PDFs and internal document repositories rarely meet that standard in practice.

The Fidugius Financial Accounting & Reporting Manual structures accounting policies in a searchable, cross-referenced platform, linked to chart of accounts guidance, accounting treatments and reporting lines. Finance teams across entities work from the same policies, with the context they need to apply them correctly.