What Are Accounting Policies Under IFRS?
Accounting policies are the specific principles, bases, conventions, rules, and practices a company applies when preparing and presenting its financial statements. They determine how a transaction, balance, or event is recognised, measured, and disclosed. Under International Financial Reporting Standards (IFRS), the standard that governs the selection, application, and disclosure of accounting policies is IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.
Accounting policies cover the full lifecycle of a transaction: recognition (when an item is recorded), measurement (how it is valued), and presentation and disclosure (how it appears in the financial statements and notes). Where more than one IFRS treatment is permitted for the same type of transaction, the choice a company makes is its accounting policy for that item, and that choice must be applied consistently across similar transactions unless a change is justified.
For UAE companies, choosing the right accounting policy is not a formality. It affects reported profit, tax base under the UAE Corporate Tax framework (Federal Decree-Law No. 47 of 2022, which computes taxable income from IFRS-based accounting net profit), loan covenant compliance, and how investors and auditors assess the reliability of the numbers.
How IAS 8 Governs the Selection and Application of Accounting Policies
IAS 8 sets out a hierarchy for selecting an accounting policy. Where an IFRS standard specifically applies to a transaction, that standard’s requirements govern. Where no standard or interpretation specifically applies, management must use judgement to develop a policy that produces information which is relevant to users’ decision-making and reliable, meaning it faithfully represents the transaction, is neutral, is prudent, and is complete in all material respects.
In developing that judgement, IAS 8 requires management to consider, in descending order, the requirements in other IFRS standards dealing with similar issues, the definitions and recognition criteria in the IFRS Conceptual Framework, and pronouncements of other standard-setting bodies only to the extent they do not conflict with IFRS.
Once selected, a policy must be applied consistently for similar transactions, other than where an IFRS standard specifically permits or requires categorisation of items for which different policies may be appropriate.
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
The Going Concern and Accrual Concepts in Policy Selection
Two underlying concepts shape how accounting policies are chosen and applied. The going concern assumption means financial statements are prepared on the basis that the entity will continue operating for the foreseeable future, rather than on break-up or liquidation values. Directors and those charged with governance must assess, at each reporting date, whether there is material uncertainty about the entity’s ability to continue as a going concern, and disclose that uncertainty if it exists.
The accrual basis requires the effects of transactions to be recognised when they occur, not when cash is received or paid, and recorded in the financial statements of the periods to which they relate. This is the default basis under the IFRS Conceptual Framework for all general-purpose financial statements, and it directly affects how revenue, expenses, and provisions are recognised regardless of cash timing.
Accounting Policies vs. Accounting Estimates: Why the Distinction Matters
One of the most common points of confusion, and a frequent source of restatement, is the difference between an accounting policy and an accounting estimate. An accounting policy is the chosen basis or method for recognising and measuring an item (for example, measuring inventory at the lower of cost and net realisable value using either FIFO or weighted average cost). An accounting estimate is a monetary amount in the financial statements that is subject to measurement uncertainty and requires the use of judgement based on the most recent available, reliable information (for example, the useful life of an asset, an expected credit loss allowance, or an inventory obsolescence provision).
The distinction matters because IAS 8 treats the two very differently. A genuine change in accounting policy is generally applied retrospectively, meaning prior period comparatives are restated as if the new policy had always been applied. A change in accounting estimate is applied prospectively, affecting only the current and future periods, with no restatement of prior periods. Misclassifying a policy change as an estimate change (or the reverse) is a recurring audit finding, because it changes both the accounting treatment and the disclosure obligation.
Must check: Accounting Review Services
Worked Example: Choosing Between Two Acceptable Inventory Valuation Policies
Consider a UAE trading company that holds inventory purchased at varying prices throughout the year. IFRS (IAS 2, Inventories) permits the First-In-First-Out (FIFO) method or the weighted average cost method for valuing inventory; the Last-In-First-Out (LIFO) method is not permitted under IFRS. Both FIFO and weighted average are acceptable accounting policies, but they produce different results.
| Factor | FIFO | Weighted Average Cost |
|---|---|---|
| Effect during rising prices | Lower cost of sales, higher reported profit and inventory value | Smoother cost of sales, more moderate profit swings |
| Administrative effort | Requires tracking of purchase batches and sequencing | Simpler recalculation after each purchase |
| Best suited to | Businesses with distinct, traceable inventory batches (e.g. perishables, serialised goods) | Businesses with high-volume, homogeneous inventory (e.g. bulk commodities) |
Once the company selects, say, weighted average cost, that policy must be disclosed in the notes to the financial statements and applied consistently to all inventory of a similar nature and use. Switching to FIFO in a later period is a change in accounting policy, not a change in estimate, and triggers the retrospective restatement and disclosure requirements described below, unless the change is required by a new IFRS standard.
When and How to Change an Accounting Policy Under IAS 8
IAS 8 permits a change in accounting policy only in two circumstances: the change is required by an IFRS standard or interpretation, or the change results in the financial statements providing reliable and more relevant information about the effects of transactions on the entity’s financial position, performance, or cash flows. A change made simply because management prefers a different presentation, without either justification, does not meet the IAS 8 threshold.
Frequent, unjustified changes to accounting policy undermine comparability between periods, which is one of the qualitative characteristics users rely on to assess trends in performance. This is why IAS 8 treats voluntary changes as the exception rather than the norm, and requires a clear rationale for any change that is not mandated by a new standard.
Companies should also review their accounting policies against new and amended IFRS standards before those standards become mandatorily effective. Early adoption is not required unless a standard specifically permits it, but reviewing the effect in advance avoids a rushed transition in the mandatory adoption period.
Related: Backlog Accounting Services
Disclosure Requirements for Accounting Policies
IAS 1, Presentation of Financial Statements, requires an entity to disclose, in the summary of significant accounting policies, the measurement basis (or bases) used in preparing the financial statements and the other accounting policies applied that are relevant to understanding the financial statements. Where a change in accounting policy has a material effect on the current period or any prior period, IAS 8 requires disclosure of the nature of the change, the reasons it provides reliable and more relevant information, and, for retrospective application, the amount of the adjustment for each financial statement line item affected and for basic and diluted earnings per share, both for the current period and each prior period presented.
Where retrospective application is impracticable, the entity must disclose that fact and explain how and from when the change has been applied instead. These disclosures are a common area of review during both statutory audits and UAE Corporate Tax compliance checks, since taxable income is derived from IFRS-based accounting profit.
Accounting Policies, Estimates, and Materiality in UAE Financial Reporting
Materiality plays a role in both policy selection and estimation. IAS 8 does not require correction of immaterial errors or disclosure of policies that would not reasonably influence the decisions of users of the financial statements. However, “immaterial” is a judgement call that depends on the size and nature of the item relative to the entity’s overall financial statements, not a fixed percentage threshold.
Estimates, by contrast, are inherently subjective because they rely on the most recent available information rather than certainty. IAS 8 requires that estimates be based on reasonable and supportable assumptions, reviewed on an ongoing basis, and revised when new information or circumstances indicate a previous estimate needs updating. The revision itself is not a correction of an error and does not require retrospective restatement.
Also check: Accounting & Bookkeeping Services
Key Takeaways
Choosing the right accounting policy under IFRS starts with identifying whether a specific standard governs the transaction and, where judgement is required, applying the IAS 8 hierarchy to reach a policy that is both relevant and reliable. UAE entities should document the policy chosen, apply it consistently, distinguish clearly between policy changes and estimate changes, and disclose changes with the level of detail IAS 8 and IAS 1 require. Getting this distinction wrong is one of the more common causes of restated financial statements and avoidable audit findings.
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
Frequently Asked Questions on Accounting Policies Under IFRS
What is an accounting policy under IFRS?
What is the difference between an accounting policy and an accounting estimate?
Which IFRS standard governs the selection and disclosure of accounting policies?
Can a UAE company change its accounting policy whenever it wants?
What must a company disclose when it changes an accounting policy?
How can Farahat & Co. help a UAE business select and document the right accounting policies?
How Farahat & Co. Can Help
Farahat & Co. supports UAE businesses in selecting, documenting, and applying IFRS-compliant accounting policies, and in preparing the disclosures required for statutory audit and Corporate Tax filing.
Contact Farahat & Co. today to discuss your accounting policy and financial reporting requirements.
