Accounting glossary term
Accounting Policy
An accounting policy is the specific principle, basis, convention, or rule a company applies in preparing its financial statements — for example, the method used to value inventory (FIFO vs weighted average) or to depreciate property (straight-line vs reducing balance). Policies must be consistent year to year unless a change is justified.
What is Accounting Policy?
An accounting policy is the specific principle, basis, convention, or rule a company applies in preparing its financial statements — for example, the method used to value inventory (FIFO vs weighted average) or to depreciate property (straight-line vs reducing balance). Policies must be consistent year to year unless a change is justified.
How It Works
- Selected from IFRS where the standard allows a choice (e.g., revaluation vs cost model for PPE)
- Disclosed in the notes; significant policies are summarized at the front
- Changes are retrospective: prior periods are restated and any cumulative effect adjusts opening retained earnings
- A change is allowed only if required by a standard or it produces more reliable or relevant information
- Different from accounting estimates, which are prospective
Saudi Context
Saudi listed companies disclose accounting policies under IFRS in their annual reports. SOCPA-licensed auditors check both that policies comply with IFRS and that they are applied consistently. Policy changes have to clear materiality and disclosure tests reviewed by the audit committee.
Example
A Saudi retailer changes its inventory valuation method from weighted-average to FIFO because FIFO gives a closer approximation to current cost in a rising-price environment. Prior periods are restated, opening retained earnings adjusted, and the change is fully disclosed in the notes.
Related Terms
- Accounting Estimate Change
- Materiality Principle