A summary of the significant accounting policies used in the preparation and presentation of the financial statement of a business is a compulsory compliance issue in IFRS and US GAAP. A financial statement is not complete without the inclusion of the accounting policies it used to prepare those statements.
Definition of summary of significant accounting policies
Summary of significant accounting policies can be defined as the statement of the accounting policies used by management in the preparation of financial statements.
What to Note:
1. These policies include measurement, estimates, principles, translations, consolidation and the basis of preparation and presentation of financial statements.
2. A summary of the significant accounting policies is usually presented under the Notes to the account.
3. The policies also include any changes in one or more accounting policies a company incorporates into the financial statement.
For example, a change in the Depreciation policy of a company must be clearly stated in the summary of significant accounting policy.
4. A firm may begin the adoption of IFRS or some part of it for the first time. In such a case, the entity must state the changes it makes on its accounting policies. A good example is that done in the 2018 annual report of Access bank Nigeria Plc. Under the Notes to the account, it stated the changes in its significant accounting policies in certain IFRS. These IFRS or IAS includes:
a. IFRS 9 Financial Instruments
b. IFRS 15 Revenue from Contracts with Customers
c. Classification and Measurement of Share-based Payment Transactions – Amendments to IFRS 2
d. Interpretation 22 Foreign Currency Transactions and Advance Consideration.
5. The style of presenting the summary of significant accounting policies may depend on the industry and countries. For example, the European Union applies IFRS standards. However, it usually makes changes to some IFRS. In such a case, the reporting entity will state that it applied IFRS based on the changes made by the EU.
6. In Nigeria, the style used by banks to prepare it’s significant accounting policies differs a bit with that of other industries. To illustrate, the style of presenting this policy differs between Access Bank Plc and Dangote Cement Plc.
To conclude, the summary of the statement of significant policy is an important aspect investor examined This summary reveals if management is aggressive or conservative to ensure that it’s firm earned profit.