These are defined in FRS 18 as those principles, bases, conventions, rules and practices applied by an entity that specify how the effects of transactions and other events are to be reflected in its financial statements through:

(i) recognising

(ii) selecting measurement basis for, and

(iii) presenting assets, liabilities, gains, losses and changes to shareholders funds.

In other words, accounting policies define the processes whereby transactions and other events are reflected in the financial statements. FRS 18 sets out two main qualitative characteristics and four enhancing qualitative characteristics that information in the financial statements should possess in order for the content of the financial statements to be useful to its users. When an accounting policy is to be selected, its appropriateness to the business should also be considered against these qualities. These are relevance, reliability, comparability, understandability, verifiability and timeliness.

Relevance 

Financial information must be relevant to the decision making process and should have the ability to influence the economic decision of the users by helping them evaluate past, present and future events. In making choices, businesses should select accounting policies or financial information that is useful in assessing stewardship and in making economic decisions.

Reliability 

Financial information must be reliable in reflecting the substance and economic reliability of the transactions and other events that occurred and not merely the legal form of the events – i.e. substance over form. The information must be free from material error and bias – i.e. neutral – and it must be dependable upon by its users to represent faithfully what it claims to represent as at the date of the financial statements. This is also known as faithful representation. Financial information produced under uncertainty, where decisions have to be made on estimates e.g. allowance for doubtful debts, must exhibit a level of caution and prudence in order to be reliable.

Comparability 

Financial information must be comparable and consistently applied over time to enable its users be able to compare similar information on the business for other periods. Financial statements must include corresponding information for the preceding periods and any changes in accounting policies used, must be notified to the users of the financial statements.

Understandability 

Financial information must be understandable by its users who should have a reasonable knowledge of the business, its economic activities, the financial statements of the business and a willingness to study the information presented.

Verifiability 

Financial information must be verifiable by its users from the notes to the accounts and other supporting documents or business documents and the data contained in the financial statements should be accurate and should be a true representation of the information contained in the raw data used to prepare the accounts.

Timeliness 

Financial information must be delivered in a timely manner to its users to make it useful to them in their decision making process.