An accounting policy is a series of specific principles, bases, conventions, rules, and procedures adopted by an entity to prepare and present its financial statements.
Below, we will show several examples of accounting policies.
Example of accounting policy Property plant and equipment
Property, plant, and equipment are tangible assets owned to be used in producing and supplying goods and services, leased to third parties, or for functions related to the entity’s administration.
These assets are expected to be used during more than one accounting period.
Entity XXX within the heading that makes up these assets has four classes.
- Telecommunications equipment.
The entity uses the revaluation model for buildings and the cost model for other assets.
The entity recognizes decommissioning costs as a higher value of the property, plant, and equipment, and the discount rate used to calculate this provision is 11%.
Machinery is depreciated using a useful life of 20 years as a base, telecommunications equipment is depreciated based on a useful life of 25 years, and both types of assets are depreciated using the units of production method.
On the other hand, the entity has five buildings and three warehouses; these assets are depreciated using the straight-line method.
The useful lives of these assets are shown below.
Building 1: 60 years
Building 2: 90 years
Building 3: 75 years
Building 4: 70 years
Building 5: 120 years.
Warehouse 1: 40 years
Warehouse 2: 55 years
Warehouse 3: 80 years
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Example of accounting policy questions
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Which of the following examples is an accounting policy?CorrectIncorrect
Example of accounting policy Intangible assets
An intangible asset is an identifiable non-monetary asset without physical appearance.
Company XXX has two intangible assets: Intangibles acquired from third parties and internally generated intangibles.
Among the acquired intangible assets are the following:
And among the internally generated assets is the development of a cold vaccine.
The company recognizes all development expenses that meet the criteria in paragraph 57 of IAS 38 as intangible assets; all other costs must be recognized in profit and loss.
Expenses related to the maintenance of software are recognized in profit and loss.
All intangibles with no foreseeable limit for the consumption of economic benefits will not be amortized because they are considered assets with indefinite useful lives.
The useful lives of the other intangibles are shown below:
Software: 15 years
Licenses: 10 years.
Example of accounting policy Goodwill.
The Goodwill recognized in the financial statements of company XXX corresponds to the acquisition of 90% of the ordinary shares of entity XXX.
This asset will not be amortized, but it will be necessary to establish whether this Goodwill may present some impairment.
Example of accounting policy Inventory
Inventories are assets:
- Held for sale in the ordinary course of business.
- In the process of production for such a sale.
- In the form of materials or supplies to be consumed in the production process or in the rendering of services.
Inventories shall be measured at the lower of cost and net realisable value.
Whenever the net realizable value of the company’s inventories is below its recoverable amount, the entity must recognize an impairment loss for the difference generated.
The company will constantly assess whether the conditions that led to recognizing this impairment no longer exist to reverse the loss.
In the case of products manufactured and in process, the costs include the general costs of production based on normal capacity.
These costs do not include interest costs and exchange difference costs.
The net realizable value is the estimated sale value during the normal course of business, less the costs of completion and the estimated costs necessary to affect the sale.
Example of accounting policy non-current assets held for sale:
Non-current assets held for sale are assets that the entity expects to sell sporadically.
These assets must be available for immediate sale in its present condition, subject only to usual and customary terms for such assets, and its sale must be highly probable.
The company measures these assets at the lower of their recoverable amount and their fair value less costs to sell.
Once an asset has been classified as held for sale, depreciation must cease.
Within the strategic plan for the sale of the company assets is the disposition of 15 buildings located in different geographical areas.
Example of accounting policy Investment Property
Investment property is real estate held to earn rental income or for capital appreciation, or both, but not for sale in the ordinary course of business, in producing and supplying goods and services, or for functions related to the entity’s administration.
The entity uses the fair value model to show the increase or decrease in the value of these assets.
Changes in the value of these assets will be recognized in profit and loss.
Example of accounting policy provisions
The company recognizes a provision if, as a result of a past event, the entity has a legal obligation or implicit that it can be estimated reliably, and it is probable that an outflow of economic benefits will be necessary to settle the obligation.
Provisions are determined by discounting the cash flows that the entity expects to disburse in the future in terms beyond 12 months, using an interest rate that reflects the current market assessment of the value of money over time and the specific risks associated of the obligation.
Currently, the entity has two legal provisions associated with two legal proceedings, in which there is no certainty of the trial date and the amount that the company will probably have to disburse for the said obligation.
And on the other hand, the entity has an obligation associated with costs for dismantling the product of the adaptation of a site so that a machine can operate under management entity specifications.