Accounting Policies

What Are Accounting Policies?

Accounting policies are the specific principles, methods, and procedures a company or organization adopts for accounting and preparing financial statements based on accounting standards and regulations. They reflect the entity's choices and judgments regarding accounting recognition, measurement, and reporting, influencing the quality and comparability of accounting information.

Accounting policies are formulated by a company’s management or accounting firms and are reviewed and approved by the audit committee or auditors. These policies are applied in accounting processes to recognize and measure the company's financial transactions and events, ultimately impacting the presentation of financial statements.

Content of Accounting Policies

Accounting policies involve the regulations and choices regarding accounting treatment and measurement methods during the preparation of financial statements. They cover multiple aspects, including but not limited to the following important contents.

1. Asset Measurement: This includes the recognition and measurement methods of a company's assets, such as the historical cost method, fair value method, amortized cost method, etc.
2. Liability Measurement: This includes the recognition and measurement methods of a company’s liabilities, such as the historical cost method and fair value method.
3. Revenue Recognition: This addresses the timing, conditions, and amount of revenue recognition.
4. Expense Recognition: This deals with the timing and amount of expense recognition.
5. Inventory Valuation: This includes inventory valuation methods such as the First-In-First-Out (FIFO) method and the weighted average method.
6. Investment Measurement: This includes the recognition and subsequent measurement of investments by the company.
7. Turnover Rates: This involves the turnover rates of a company’s inventory, accounts receivable, and accounts payable, reflecting the company’s operating efficiency.
8. Depreciation and Amortization Policies: This includes the methods of depreciation for fixed assets and amortization of intangible assets.
9. Choice of Accounting Standards: This relates to the accounting standards a company chooses to follow, such as International Financial Reporting Standards (IFRS) or Chinese Accounting Standards (CAS).
10. Impairment Testing Policies: This involves the testing and provisioning for asset impairment.
11. Capitalization vs. Expensing Policies: This relates to the treatment of expenditures as either capitalized or expensed.

Types of Accounting Policies

The types of accounting policies encompass various regulations and choices made by companies during the preparation of financial statements. Common types include the following aspects.

1. Accounting Methods: These are the accounting treatments methods used for specific economic transactions, such as inventory valuation methods, fixed asset depreciation methods, and revenue recognition methods.
2. Accounting Principles: These are the general rules a company follows during accounting and the preparation of financial statements, such as the principles of conservatism, comparability, and materiality.
3. Measurement Bases: These are the monetary measurement units used during accounting and the preparation of financial statements, such as historical cost, present value, and fair value.

Different types of accounting policies affect a company’s financial condition and operating results differently. When choosing accounting policies, companies should consider national regulations and economic policies, economic conditions and foreign trade, corporate structure and capital framework, business characteristics and development status, prevailing practices, the level of accounting theory research, education levels, and the quality of accounting personnel.

Characteristics of Accounting Policies

From different perspectives, the characteristics of accounting policies can be as follows:

1. Selectivity: Companies can choose from various allowable accounting treatments for the same economic transaction based on their specific situation and objectives to select the most suitable accounting policies.
2. Hierarchical Structure: Accounting policies include three levels: accounting principles, measurement bases, and accounting methods.
3. Stability: Once a company selects an accounting policy, it should consistently follow and apply that policy without arbitrary changes.
4. Variability: Under certain conditions, companies can change their adopted accounting policies based on economic environment, industry characteristics, management needs, and other factors.
5. Institutionalization: Accounting policies are typically clearly defined in internal financial regulations or accounting manuals and are executed and supervised by the company’s management and financial departments.
6. Transparency: Companies are required to fully disclose the accounting policies adopted in their financial statements to enable investors and other stakeholders to understand the accounting treatments and their impact on financial statements.
7. Auditability: Accounting policies should facilitate the audit institutions in auditing and verifying the company’s financial statements.

Role of Accounting Policies

Accounting policies play a significant role in corporate financial management, highlighted in the following aspects:

1. Impact on Financial Statements: Different accounting policies can result in varying amounts and metrics on financial statements, influencing investors’ and other stakeholders’ understanding of the company’s financial condition and performance.
2. Providing Decision-Making Basis: The appropriate selection of accounting policies allows companies to flexibly handle accounting methods, making financial statements more reflective of the company’s operations, thus providing accurate financial information for management’s decision-making.
3. Ensuring Comparability of Financial Statements: Consistent accounting policies over time ensure the comparability of financial data across periods, aiding investors and stakeholders in cross-period comparisons and analyses.
4. Increasing Transparency: Transparent financial statements help investors and other stakeholders understand the company’s financial condition and performance, thereby enhancing investor confidence.
5. Supporting Auditing: Reasonable accounting policies can simplify the auditing process, allowing auditing institutions to audit and verify the company’s financial statements more efficiently.
6. Promoting Healthy Corporate Development: Selecting accounting policies that suit the company’s characteristics and development stage can optimize the asset-liability structure, enhance capital operation efficiency, improve risk management capabilities, stimulate innovation, and drive high-quality corporate development.
7. Compliance with Laws, Regulations, and Accounting Standards: The selection of accounting policies must comply with relevant laws, regulations, and accounting standards to ensure that the company’s financial statements are legal and prevent violations.

Institutions that Establish Accounting Policies

The formulation of accounting policies involves multiple institutions and departments, which may vary across countries and regions. Generally, the main institutions responsible for establishing accounting policies include:

1. National or Regional Financial Departments: These departments are typically responsible for formulating and issuing accounting standards and systems, providing a guiding framework for companies.
2. Accounting Standards Boards: In some countries, these specialized institutions are responsible for formulating accounting standards and policies, comprising members such as professional accountants, scholars, and representatives from regulatory bodies.
3. Accounting Industry Associations: Associations in some countries, like the American Institute of Certified Public Accountants (AICPA), may also participate in establishing accounting policies.
4. International Accounting Standards Board (IASB): For global accounting policies, the IASB is responsible for issuing International Financial Reporting Standards (IFRS), which countries and regions can reference or adopt as needed.
5. Other Agencies Establishing Policies for Special Industries or Fields: Specific industries or fields often have their own accounting policies formulated or approved by relevant regulatory bodies or industry associations. For example, in the financial industry (banks, insurance companies, securities firms) and distinct fields (public companies, non-profit organizations), policies are formulated based on their unique characteristics and regulatory requirements, in addition to following unified national accounting systems and standards.