Summary of significant accounting policies definition

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What is the Summary of Significant Accounting Policies?

The summary of significant accounting policies is a section of the footnotes that accompany an entity's financial statements, describing the key policies being followed by the accounting department. This summary is usually placed at or near the beginning of the footnotes. The policy summary is mandated by the applicable accounting framework (such as GAAP or IFRS). These frameworks require an organization to disclose its most important policies, the appropriateness of those policies, and how they impact the reported financial position of the firm.

The disclosure of accounting policies is particularly important in situations where an organization chooses to follow policies that depart from the policies generally used within its industry. By perusing these policies, the investment community will have a better understanding of how the accounting policies used could alter the reported financial results and financial position of an entity.

The policy summary can include policies from a broad range of operational and financial areas, including cash, receivables, intangible assets, asset impairment, inventory valuation, types of liabilities, revenue recognition, and capitalized costs.

Related AccountingTools Courses

GAAP Guidebook

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Example of a Summary of Significant Accounting Policies

Inscription International is a manufacturer of titanium pens. Here is a sampling of its summary of significant accounting policies, to provide an example of what this disclosure looks like:

  • Basis of presentation. The financial statements of Inscription International have been prepared in accordance with the requirements of International Financial Reporting Standards (IFRS).

  • Revenue recognition. Revenues from our pen and cartridge sales are recognized when shipped to customers, and when the collection of the related accounts receivable are reasonably assured.

  • Inventory valuation. We value our pen inventory at the lower of cost or market, with cost being determined using the weighted average method.

  • Fixed assets. All fixed assets are recorded at cost, and subsequently depreciated over their estimated useful lives using the double-declining balance method. The useful lives of our fixed assets range from three to 10 years.

  • Intangible assets. Our acquired intangible assets all relate to purchased patents. The costs of these assets are amortized on a straight-line basis over their useful lives, which are set at 10 years.