Accounting Principles and Policies: Framework Guide

Last reviewed: July 2026.

Accounting Principles and Policies: Framework Guide is a practical guide designed to connect current accounting requirements with clear preparation steps, calculations and review controls.

Principles, policies and estimates are different

Accounting principles are broad ideas that support useful financial reporting. Accounting policies are the specific principles, bases, conventions, rules and practices an entity applies to transactions. Accounting estimates are monetary amounts subject to measurement uncertainty. Separating these concepts matters because a policy change, an estimate change and an error correction have different accounting and disclosure consequences.

The role of the Conceptual Framework

The Conceptual Framework explains the objective of general-purpose financial reporting, the qualitative characteristics of useful information, the definitions of financial-statement elements, recognition, measurement, presentation and disclosure. It does not override an IFRS Accounting Standard. Instead, it helps the IASB develop consistent standards and helps preparers exercise judgement when no standard directly addresses a transaction.

Relevance and faithful representation

Useful information must be relevant and faithfully represent the economic substance of what it describes. Relevance means the information can influence decisions through predictive or confirmatory value. Faithful representation requires completeness, neutrality and freedom from material error. These qualities work together: a perfectly measured irrelevant detail is not useful, and a relevant estimate is not useful if its assumptions are biased or hidden.

Enhancing qualitative characteristics

Comparability, verifiability, timeliness and understandability enhance useful information. Comparability is not the same as uniformity; similar transactions should be reported similarly and different transactions differently. Verifiability can arise from direct evidence or from checking inputs and methods. Timeliness means information reaches users while it can still affect decisions, while understandability requires clear classification and presentation without removing necessary complexity.

IAS 8 policy hierarchy

When a specific IFRS Standard applies, the entity follows that Standard. When no Standard directly applies, management develops a policy that produces relevant and reliable information. IAS 8 directs management first to requirements dealing with similar and related issues, then to the definitions, recognition criteria and measurement concepts in the Conceptual Framework. Industry practice and other standard setters may inform judgement only when they do not conflict with this hierarchy.

Consistency and changes in policy

A policy should be applied consistently to similar transactions unless a Standard requires or permits categories with different policies. A voluntary policy change is appropriate only when it results in more reliable and relevant information. Policy changes are generally applied retrospectively, which means adjusting opening equity and comparative information as if the new policy had always been used, subject to specific transition provisions or impracticability.

Estimates and prospective treatment

Estimates change when new information, experience or developments alter the expected amount or pattern. Examples include useful lives, residual values, expected credit losses and provisions. These are not errors. Their effects are recognised prospectively in the period of change and, where relevant, future periods. Documentation should explain the new information, the revised method and the financial effect.

Errors and retrospective correction

Prior-period errors arise from failing to use, or misusing, reliable information that was available when statements were authorised. Material errors are corrected retrospectively by restating comparatives and opening balances unless impracticable. A correction should not be disguised as a change in estimate. The distinction depends on whether the earlier amount was reasonable based on the information available at that time.

Materiality and professional judgement

Materiality is entity-specific. Information is material when omitting, misstating or obscuring it could reasonably influence decisions of primary users. A small amount may be material because of its nature, such as a related-party transaction or breach of a covenant. Good judgement considers magnitude, nature, context, aggregation and whether disclosure clarifies or obscures the overall picture.

Practical policy documentation

• State the transaction or balance covered by the policy.
• Identify the applicable Standard and recognition point.
• Explain the measurement basis and significant judgements.
• Describe presentation, disclosure and consistency controls.
• Record approval, effective date and transition treatment.

Pervasive assumptions

Accrual accounting and going concern influence the entire set of financial statements. Accrual accounting recognises effects when transactions occur rather than only when cash moves. Going concern assumes the entity will continue operating for the foreseeable future unless management intends or has no realistic alternative but to liquidate or cease trading. These assumptions affect classification, measurement and disclosure.

Substance over legal form

Financial reporting aims to represent economic substance. A transaction labelled as a sale may still be financing if control has not transferred or the seller retains significant obligations. A preference share may be a liability if it contains a contractual obligation to pay cash. Preparers should document rights, obligations, risks and control rather than relying only on names in legal documents.

Governance over policy choices

Material policy judgements should be approved through a controlled process involving finance, technical accounting and governance bodies. The file should identify alternatives considered, the relevant literature, expected effects and consistency with similar transactions. Policies should be reviewed when standards change, new transactions arise or the business model changes.

Related Accounting Support guides

Read the accounting concepts summary, the objective of financial statements guide and the consistency concept guide for connected explanations.

Authoritative references

Current foundations are set out in the Conceptual Framework for Financial Reporting and IAS 8 Basis of Preparation of Financial Statements.

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