Financial Policies

 Financial Policies

Financial policies are rules, bases, guideline for the preparation of financial statement. There are two ways of framing the financial policies i.e. international accounting standard and management judgment.

Sources of Financial Policies

1.    International Accounting Standard

First source of financial policy is international accounting standard. It is important that international accounting standard does not set financial policy, rather provide a basic guideline for policy formulation. Management can prepare a details financial policy on the bases of such guidelines.

2.    Management

Second source of financial policy formulation is management. There may be many items or circumstances which are not covered by the international accounting standard, then management can use its discretion for policy formulation.

Selection Criteria for Financial Policy

Basic selection criteria for financial policy are production of reliable & relevant information to meet the user information needs.

1.    Reliable Information

Reliable information means information which can be trusted. The financial information is used by number of user for difference economic decisions; therefore it is crucial that this information must be reliable.

2.    Relevant information

Financial policy should also provide relevant information to the user. It means financial policy should be formulated in a way that it provided that information required (relevant) to the user.

Consistency of Financial Polices

1.    Similar items

Management should use same accounting policy for similar items. For example a reducing balance policy is used for all vehicles in the organization. Management should not use reducing balance for some vehicles and fixed installment policy for other assets.

2.    No Change in Accounting policy

Management should not change the accounting policy from one period to another, because this change impairs the comparability of financial statements. In simple words in case of change in policy, the information of two cannot be compared.

3.    Change in Special Circumstances   

        

The accounting policies can only be changed when this is required by the international accounting standard, or other policy would result in more appropriate presentation. The change should be applies retrospectively i.e. all presented account must be changed accordingly.