Accounting Policy Disclosure

What is Accounting Policy Disclosure?

IAS 1.117 requires an entity to disclose its material accounting policy information in the notes. Before the February 2021 amendment (effective January 2023), the standard used the word "significant." The shift to "material" was deliberate. It ties disclosure obligations to the same materiality concept the entity already applies elsewhere in the financial statements, which means a policy is disclosable only when omitting it could reasonably be expected to influence the decisions of primary users.

IAS 1.117A adds that accounting policy information is material if it relates to material transactions or events, or if the entity exercised judgment in applying a policy to its specific circumstances. An entity reporting under IFRS 16 that holds only two low-value printer leases, for example, does not need a full lease accounting policy note. An entity with EUR 40M of right-of-use assets on its balance sheet does.

The auditor's responsibility sits in ISA 700.13(e), which requires the opinion to refer to the notes that contain material accounting policy information. ISA 720.14 obliges the auditor to read the other information (including the accounting policy note) and consider whether it is materially inconsistent with the financial statements. When the policy note describes a method the entity did not actually apply, that inconsistency must be addressed before the auditor's report is signed.

Worked example

Client: Italian food production company, FY2025, revenue EUR 67M, IFRS reporter. Rossi carries four categories of assets on its balance sheet: property and equipment (EUR 18M), intangible assets (EUR 2.1M consisting of trademarks), inventories (EUR 9.4M), and trade receivables (EUR 11.6M). The engagement team reviews the accounting policy note drafted by the client's finance team.

Step 1 — Identify material policies

The engagement team maps each balance sheet line item and income statement category to the accounting policy note. Property and equipment, inventories, revenue from contracts with customers, and the expected credit loss model for trade receivables are all material. The trademark intangible (EUR 2.1M, or 1.6% of total assets) is below the team's materiality threshold of EUR 2.7M.

Documentation note: record the mapping between financial statement line items and disclosed policies. Note the materiality assessment that excludes the trademark intangible policy from required disclosure under IAS 1.117A.

Step 2 — Evaluate entity-specificity

The revenue policy note states "revenue is recognised in accordance with IFRS 15." This is boilerplate. Rossi sells fresh and preserved food products under contracts with different delivery terms. The policy note must describe the point at which control transfers for each product category and the treatment of trade discounts and volume rebates as variable consideration. It must also address the right-of-return policy for perishable goods.

Documentation note: document the deficiency in the draft policy note. Record the specific IFRS 15 application judgments the entity must disclose: transfer of control timing per product line, variable consideration estimation method, refund liability measurement, and right-of-return accounting.

Step 3 — Assess judgment disclosures

Rossi applies the provision matrix approach to measure expected credit losses on trade receivables. IAS 1.122 requires disclosure of judgments that have a significant effect on the amounts recognised. The choice of historical loss rates and the grouping of receivables by customer segment both qualify as judgment disclosures, as does the forward-looking macroeconomic adjustment applied to the matrix.

Documentation note: record that IAS 1.122 applies to the ECL methodology. List the specific judgments: receivable grouping criteria, historical loss rate period, forward-looking macroeconomic overlay, and the sensitivity of the ECL balance to changes in the overlay.

Step 4 — Finalise and cross-reference

The engagement team requests Rossi to revise the policy note. The revised note contains four material policies (property and equipment, inventories, revenue, expected credit losses), each written with entity-specific detail. The trademark intangible policy is removed. The team cross-references each policy to the relevant line-item note.

Documentation note: record the final list of disclosed policies and the basis for excluding the trademark policy. Include the cross-reference from each policy to its corresponding line-item note. Confirm that the policy note is consistent with the accounting treatments applied in the financial statements per ISA 720.14.

Conclusion: the revised policy note is defensible because each disclosed policy passes the IAS 1.117A materiality filter and contains entity-specific application detail tied directly to a material line item in Rossi's financial statements.

Why it matters in practice

• The FRC's 2023 thematic review of accounting policy disclosures found that a majority of entities in its sample disclosed policies copied directly from IFRS standards without tailoring. IAS 1.117B(b) states that accounting policy information that merely duplicates the requirements of IFRS standards is unlikely to be material. Auditors who accept unmodified boilerplate in the policy note risk an ISA 720 inconsistency if the entity's actual application differs from the generic wording.
• Teams often retain policies for immaterial transactions after applying the 2021 amendment. IAS 1.117A narrows the disclosure obligation to material policies only. Leaving a full lease accounting policy note in the financial statements of an entity with EUR 30,000 of short-term lease expense does not violate the standard, but it obscures the policies that users actually need and dilutes the relevance of the note as a whole.

Accounting policy disclosure vs. accounting estimate disclosure

The practical difference matters when the entity buries an estimation judgment inside a policy note. IAS 1.125 requires a separate disclosure of estimation uncertainty for any assumption that carries significant risk. Wrapping that disclosure into a generic policy paragraph prevents users from identifying which numbers are most sensitive to change.

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