Writing the accounting policies note

The accounting policies note should tell a reader how this company turns its own transactions into the numbers in its accounts: the basis of preparation, the measurement bases, and the specific policies for each material item, written for the company’s actual circumstances. Company law sets a floor, FRS 102 paragraph 8.5 asks for material accounting policy information, and paragraph 8.5C says entity specific wording is more useful than text that repeats the standard. A good note is usually shorter than a template, not longer.

What must the policies note contain by law?

Paragraph 44 of Schedule 1 to both the Small Companies Regulations (SI 2008/409) and the Large and Medium sized Companies Regulations (SI 2008/410) requires the accounting policies used to determine the amounts in the balance sheet and the profit or loss to be stated, including the policies for depreciation and diminution in value of assets. For small companies, FRS 102 repeats this in paragraph 1AC.3 of Appendix C to Section 1A, using the words depreciation and impairment.

Some items have their own legal rules for the policies note:

• Development costs. If any are capitalised, the note must give the period over which they are written off and the reasons for capitalising them (Schedule 1, paragraph 21(2); FRS 102 paragraph 1AC.4). FRS 102 footnote 36 points out this is required regardless of materiality.
• Revalued fixed assets. The items affected and the basis of valuation must be disclosed in the policies note (Schedule 1, paragraph 34(2); paragraph 1AC.14).
• Compliance with standards. For large companies, paragraph 45 of Schedule 1 to SI 2008/410 requires a statement of whether the accounts have been prepared in accordance with applicable accounting standards, with particulars of and reasons for any material departure. Regulation 4(2A) exempts medium sized companies.

What does FRS 102 add?

Paragraph 8.5 requires disclosure of material accounting policy information, including the measurement basis or bases used, such as historical cost or fair value. Policy information is material if, together with the rest of the accounts, it could reasonably be expected to influence users’ decisions. Paragraph 8.5A says information about immaterial items is generally immaterial and need not be given, subject to the legal requirements above. Paragraph 8.5B lists the situations where policy information is likely to be material, such as where the policy changed, was chosen from options, was developed under Section 10 because no section applies, involves significant judgements, or where the accounting is complex. Paragraph 8.5D adds a trap: deciding a policy is immaterial does not remove the disclosure requirements of other sections.

The note also normally carries the statement of compliance required by paragraph 3.3 (and, for small entities, the statement that Section 1A has been applied under paragraph 1AC.2A) and the going concern disclosures under paragraph 3.8A. Paragraph 8.6 allows the significant judgements made in applying policies to sit with the policy information or in another note. Our page on FRS 102 Section 8 explains the materiality test in more depth; the rest of this page is about drafting.

How should the note be structured?

1. Basis of preparation. The framework (FRS 102, with Section 1A if used), the measurement basis, and the going concern statement.
2. Significant judgements and estimates. Either here or in a separate note, but only those that meet paragraphs 8.6 and 8.7.
3. Policies for material items, in the order of the primary statements. Turnover first, then items in the profit and loss account, then balance sheet items in format order. Paragraph 8.4 sets this general order, and Schedule 1 paragraph 42(2) requires notes to follow the order of the items they relate to.

Leave out policies for items the company does not have. A company with no government grants, hedging or defined benefit pension scheme does not need a policy for any of them.

How do you turn boilerplate into a useful policy?

A practical test is to ask, for each paragraph, whether it could be pasted into any other company’s accounts without change. If it could, it probably fails paragraph 8.5C. Replace general statements with the facts that drive the numbers: what the company sells, when control passes, which assets it holds and over what periods, and which options it has chosen.

Illustration only. Two versions of a tangible fixed assets policy:

Boilerplate

“Tangible fixed assets are stated at cost less accumulated depreciation and impairment. Depreciation is provided at rates calculated to write off the cost less estimated residual value of each asset over its expected useful life.”

Entity specific

“Vehicles and plant are stated at cost less depreciation and impairment. Delivery vans are depreciated straight line over four years to an estimated residual value of 20% of cost, reflecting the company’s policy of replacing vans at around 120,000 miles. Workshop equipment is depreciated straight line over eight years. The freehold workshop building is depreciated over 50 years; the value of the site itself is not depreciated.”

The second version tells the reader the actual periods and residual value assumptions, which explain the depreciation charge, and it satisfies the legal requirement to state the depreciation policy.

The same approach works for turnover. Since paragraph 1AC.32B requires small companies to describe when they typically satisfy performance obligations, significant payment terms and whether they act as agent, the turnover policy should name the company’s own revenue streams. For a software reseller that might mean explaining that licence income is recognised when the customer gets access, support income over the support period, and that commission on third party products is recognised net as agent.

Which policies deserve the most care?

Under paragraph 8.5B, the policies most likely to be material are those where the company has made a choice or a judgement. Common examples in UK private company accounts are:

• Turnover, especially long term contracts, bundled goods and services, and agency arrangements.
• Stock and work in progress, including how overheads are absorbed and how slow moving stock is written down.
• Property, where owner occupied property may be carried at cost or revalued under paragraphs 17.15B to 17.15F, while paragraph 16.7 requires investment property to be measured at fair value with changes in profit or loss.
• Leases, where the periodic review amendments introduced on balance sheet accounting for lessees, with recognition exemptions for short term and low value leases.
• Financial instruments, such as how loans from directors or group companies at below market interest are measured. See directors’ loans under FRS 102.
• Deferred tax, including the rule in paragraphs 29.15 and 29.16 that deferred tax on revalued non depreciable assets and fair valued investment property uses the tax rates and allowances that apply to a sale.

What if a policy has changed?

A change of policy needs more than an updated paragraph. Paragraph 10.13 requires, where an amendment to FRS 102 affects the current or a prior period, the nature of the change and, so far as practicable, the adjustment for each line item affected, for the current period and each prior period presented, and for periods before those presented. Paragraph 10.14 sets equivalent disclosures for a voluntary change, plus the reasons the new policy gives reliable and more relevant information. For small companies, Appendix C paragraph 1AC.8 requires particulars of any adjustment to non comparable corresponding amounts.

This is directly relevant now. The Periodic Review 2024 amendments apply to accounting periods beginning on or after 1 January 2026 (paragraph 1.37), and the lease and revenue changes will affect many policy notes. Paragraph 1.39 requires the amendments to be applied retrospectively under paragraph 10.12, subject to the transitional exceptions in paragraphs 1.40 to 1.68. The detail of how to account for a change is on policies, estimates and errors.

What mistakes do reviewers see?

• Standard wording copied from the standard. Paragraph 8.5C exists to stop this.
• Policies for items the company does not have. They add length and suggest the note has not been reviewed.
• No depreciation rates or useful lives. The law requires the depreciation policy, and the reader needs the periods to understand the charge.
• A qualified compliance statement. “In accordance with FRS 102 except for” is not the explicit and unreserved statement paragraph 3.3 requires; a genuine departure is a true and fair override with its own disclosures. See what a true and fair view means.
• A policy that contradicts the numbers. For example, a policy saying all leases are expensed when right of use assets appear on the balance sheet.
• Development costs omitted as immaterial. The legal disclosure applies whatever the amount.

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Related Accountapedia entries

• Notes required in small company accounts
• The fixed asset note: costs and depreciation
• FRS 102 Section 1A: small entity reporting
• Encouraged disclosures for small companies
• Disclosing key judgements and estimation uncertainty
• Uniform accounting policies in group accounts

Sources

• legislation.gov.uk: SI 2008/409, schedule 1
• legislation.gov.uk: SI 2008/410, schedule 1
• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• legislation.gov.uk: SI 2008/410, schedule 1
• legislation.gov.uk: SI 2008/410, regulation 4

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.