Material accounting policy information, not boilerplate
Since 2021 entities disclose material accounting policy information, not significant policies. Which policies a small client's statements should keep.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Open the accounting policies of almost any small company and you will find a policy on government grants for a company that has never received one, a paragraph on foreign currency for a business that has never traded outside its own country, and a revenue policy that could describe any company in the world. The policies run to several pages. The reader learns almost nothing about this particular company from them.
That habit grew up when the requirement was to disclose "significant accounting policies", a phrase that encouraged preparers to disclose everything that might possibly qualify. The requirement changed some years ago. This article explains the change, sets out a test for each paragraph in a small company's policies, and shows how to prune the Studio's standard wording without losing what the reader needs.
The 2021 amendment: from significant to material policy information
In February 2021 the IASB amended IAS 1 to replace the requirement for entities to disclose their significant accounting policies with a requirement to disclose their material accounting policy information. The IFRS Foundation's IAS 1 page still describes the notes as including a summary of significant accounting policies, but records on the same page that the 2021 amendment replaced that requirement.
The requirement survives the move to IFRS 18. The IFRS Foundation states that these amendments are now included in paragraph B112 of IFRS 18 and paragraphs 27A-27G of IAS 8, now titled Basis of Preparation of Financial Statements. IFRS 18 replaces IAS 1 for annual reporting periods beginning on or after 1 January 2027. So whichever standard a client's year falls under, the test is materiality, not significance.
The change in wording connects policy disclosure to materiality judgements generally. The IFRS Foundation states that IFRS Standards require companies to make materiality judgements in decisions about recognition, measurement, presentation and disclosure. A policy note is a disclosure, so the same judgement applies to it as to any other note.
Policies a reader needs versus policies that repeat the standard
IFAC's article "Making Sense of Materiality" makes two points that bear directly on policy notes. It warns that when materiality is not applied appropriately, the result may be too much information, sometimes called clutter, or too little. And it states that companies which use IFRS requirements as a checklist instead of exercising judgement produce statements that comply with the requirements but do not communicate effectively to investors.
Policy notes are the clearest case of the checklist problem. A policy that restates what the standard requires, in the standard's own language, tells a knowledgeable reader nothing new and a less knowledgeable one nothing useful. Compare two inventory policies:
- "Inventories are measured at the lower of cost and net realisable value." This repeats the standard.
- "Inventories of building materials are measured at weighted average cost. Cost of manufactured roof trusses includes timber, direct labour and production overheads allocated on labour hours." This tells the reader what this company does.
The second is material accounting policy information. The first is filler.
A test for each policy paragraph in a small company's set
Put each policy paragraph through these questions, in order:
- Does the client have the item at all? If not, delete the paragraph.
- Is the related amount or transaction material to the statements? If not, the policy usually is not either, unless the item matters for reasons other than size.
- Did the client choose between options, or make a judgement, in applying the policy? If so, describe the choice or judgement. That is usually the most useful sentence in the note.
- Is the policy specific to the client's business? If it would read the same for any company, rewrite it in terms of what this client does, or remove it.
- Would a reader misunderstand the figures without it? If yes, keep it whatever its length.
A paragraph that fails the first question goes. One that fails the third and fourth is a candidate for deletion or a rewrite. What remains is usually shorter and more useful. Other trimming of the notes is discussed in cutting disclosure clutter, and the overall structure of policies and notes in accounting policies and notes.
Pruning the Studio's standard policy wording, which is labelled for review
Achekam's Studio includes standard accounting policy wording based on IFRS for SMEs, labelled for review before issue, and staff can write their own policies. The label is there for a reason: standard wording is a starting point written for any company, and the test above is how it becomes this company's policies.
Work through the set paragraph by paragraph. Remove policies for items the client does not have. Replace general wording with the client's actual choices. For a full IFRS client, remember that standard wording based on IFRS for SMEs may describe options or treatments that differ from full IFRS, and replace it where it does. Notes take their figures from the mapped trial balance, and facts the trial balance does not hold are left as "[to be completed]", which will often include the very details, such as the basis of overhead allocation or the useful lives used, that make a policy specific.
Keeping AI-drafted policy text specific to the client
Where an AI key is set up, AI can draft narrative text in the Studio, such as the nature of the business and note wording. That text is checked in code and labelled "AI draft - review before issue", and the figures still come from code. There is no separate accept step for each paragraph; the firm's review stages and the partner's signature are the safeguard. Without a key, standard wording is used.
An AI draft of a policy can be fluent and still generic. Apply the same five questions to it as to standard wording, and check every client-specific statement it makes, such as a cost formula, a depreciation method or a revenue stream, against the working papers. The revenue policy deserves particular care; see writing the revenue recognition policy.
The IFRS Foundation's IAS 1 page summarises the standard's requirements for the structure and content of financial statements and notes that IFRS 18 replaces it from 2027. On the next file, try the test on the policy note before anything else; it is usually the quickest improvement available in the whole set.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
