Question

What are regulatory requirements and other factors that accountants should consider when setting up accounting policy relating to inventory for the entities they work for? (JB Hi-Fi)

Answer 1

Accounting policies are the set rules and conventions that are provided by some national or international committee of accountancy for the entities to follow while organizing their monetary statements. The accountants have to follow these specific conventions and principles in the preparation and presentation of their final accounts.

For the countries that follow International accounting standards (IAS), an accounting standard IAS 8:Accounting policies, changes in accounting estimates and errors has been designed to help the accountants in better understanding the need and methodology of selecting and applying the accounting policies and how to follow them consistently. This standard also defines how these entities can change their accounting policies and the right method to disclose the change.

Following regulatory requirements or factors must be considered by accountants when setting up accounting policy relating to inventory:

Selection and application of accounting policies

When a Standard is available for a transaction or event, management or accountants of the entity must apply the specific guidance provided by the IASB Implementation Guidance in applying that specific accounting policy. If any preceding guidance is not available for an accounting policy, the management must use its own judgment in selecting a policy it deems fit for the scenario. Other than this, management can also use the most-recent pronouncements of the other frameworks and standard-setting bodies and apply them if the conditions match.

Consistency in accounting policies of business

For the similar transactions, an accountant must apply the similar accounting policies in a consistent manner. An entity is not allowed to change its accounting policies for one transaction for consecutive periods. If an entity is going to change its accounting policy, it should have a solid reason for that, and it should properly disclose any change in its financial statements along with the reason for change.

Changes and disclosure of accounting policies:

An entity can only change its accounting policy if some specific rules and conditions are fulfilled. These are:

· Management is allowed to change its accounting policies if it is required by a Standard

· If the change in accounting policy results in the providence of more reliable and accurate information regarding transactions, events and financial statements