Developing a policy when no IFRS standard applies
How to build an accounting policy for a transaction no IFRS standard covers, using IAS 8's order of sources and the Conceptual Framework's definitions.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Most of the time, a preparer's question is "which standard applies, and what does it say?" Occasionally the honest answer to the first half is "none". A client earns carbon credits from a tree-planting project on its farm. A cooperative receives a members' contribution in a form no template anticipated. A company enters an arrangement its industry invented last year. The ledger needs an entry, the statements need a policy, and there is no paragraph to copy.
IAS 8 anticipates this. It gives preparers an order in which to look for guidance, ending with the Conceptual Framework. Following that order, and recording that it was followed, is what turns an improvised treatment into a defensible accounting policy. This article walks through the process.
First check: does a standard or interpretation apply after all?
IAS 8 states that when an IFRS Standard or IFRS Interpretation specifically applies to a transaction, other event or condition, the entity must apply it. The hierarchy is only for genuine gaps, so the first step is to make sure the gap is real.
Many apparent gaps are not. A transaction that looks new may be a familiar one in different clothes: an unusual "subscription" is a revenue contract; a "membership fee" refundable on exit may be a financial liability; a "usage right" over equipment may be a lease. Before concluding that nothing applies, check the scope sections of the standards most likely to be relevant, and search the IFRS Foundation's interpretations. Record what was checked and why each was ruled out.
The IAS 8 order: similar standards, then the Conceptual Framework
Where no standard specifically applies, IAS 8 says management uses its judgement to develop an accounting policy, referring in descending order to:
- the requirements and guidance in IFRS Standards dealing with similar and related issues; and then
- the definitions, recognition criteria and measurement concepts in the Conceptual Framework.
"Descending order" matters. The preparer looks first for an analogy. A carbon credit the client holds to sell may share features with inventory; one held to use or trade over a longer period may resemble an intangible asset. Each analogy should be tested, not just chosen: what does the analogous standard require, and does the client's transaction share the features that drove that requirement?
Only if no analogy fits does the Conceptual Framework become the direct source. In practice, preparers usually use both: the analogy supplies the treatment, and the Framework confirms that the result is consistent with the basic definitions.
Using the Framework's definitions of assets, liabilities, income and expenses
The IFRS Foundation states that the Conceptual Framework for Financial Reporting assists companies in developing accounting policies when no IFRS Standard applies to a particular transaction. The 2018 revised Framework sets out definitions of an asset, a liability, equity, income and expenses, with guidance supporting those definitions. It also covers the objective of general purpose financial reporting, the qualitative characteristics of useful information, the reporting entity, recognition and derecognition criteria, measurement bases, presentation and disclosure, and capital maintenance.
For a gap transaction, work through the Framework's questions in sequence:
- Does the client have an asset or a liability as the Framework defines it?
- Do the recognition criteria support recording it?
- Which measurement basis gives useful information about it?
- How should it be presented and disclosed so a reader understands it?
Watch the version. For companies that use the Conceptual Framework to develop accounting policies when no standard applies, the revised Framework issued in March 2018 is effective for annual reporting periods beginning on or after 1 January 2020, with earlier application permitted. Policies developed from the older Framework and carried forward without review may rest on superseded definitions.
Recording the judgement through a technical consultation
A policy developed under the hierarchy is a significant judgement and should be documented as one. In Achekam, staff can take a technical consultation on an engagement from question to conclusion and closure. Use it for gap transactions: the question, the standards checked and ruled out, the analogies tested, the Framework analysis, the conclusion and who agreed it. If people disagree, the same area lets staff record a difference of opinion with each party's position, the escalation and the resolution.
That record serves three readers: the reviewer who signs off this year, the team that rolls the file forward next year, and any outside reviewer who later asks how the policy was reached. The general approach to documenting judgements is covered in documenting professional judgements.
Writing the client's own policy in the Studio
Achekam's Studio includes standard accounting policy wording based on IFRS for SMEs, labelled for review before issue. A gap transaction is, by definition, one the standard wording will not describe, so staff write the client's own policy. Notes take their figures from the mapped trial balance, and facts the trial balance does not hold are left as "[to be completed]".
A good gap policy does three things in a few sentences. It describes the transaction plainly. It states the treatment, including recognition and measurement. And it says, briefly, that no standard specifically addresses the item and that the policy was developed by reference to a named analogous standard or the Conceptual Framework. Readers deserve to know when a policy rests on judgement rather than a specific requirement. For where such policies sit among the rest, see accounting policies and notes.
The IFRS Foundation's Conceptual Framework page explains the Framework's purpose and how it helps preparers develop accounting policies when no standard applies. Keep it to hand, and open a consultation the first time a client's transaction leaves you searching for a standard that is not there.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
