Now this is something that’s more or less the text from prior periods. The accounting principles do not change this often or on such a scale that you’d have to rewrite the entire section on your report. Once you’ve gotten it all written up you’re safe for a long time.

Making this section for the first time is somewhat of a challenge however. The accounting principles you generally use in your everyday accounting are brought to users in long and complicated documents. However in the Annual Report in the Accounting principles section you have to come up with a short summary of those principles and at the same time make it understandable and consistent. For all applicable (something we explain further down) principles what you want to describe in simple sentences is as follows:

• How specific items are initially recognized (i.e. in their cost value) and how this value is reached (i.e. all expenses made to purchase the asset are considered as its cost value)
• How the item is measured subsequently (i.e. in their cost value less any write-offs)
• How the item is taken off from the statements if applicable (i.e. in case of PPE items they’re either sold or written off when they become obsolete)
• Anything other specific you’d do to the item (i.e. allowances measured for doubtful receivables – when and how is it measured, how’s it recognized and in this example also reversed)

When you’re making the section for the very first time just try to find simple and short answers to those questions from your local accounting policies. Essentially what you should do is give a short summary of how you account for the specific item. You assume the user of the report has basic knowledge of accounting (i.e. he or she knows the meaning of “cost value”) and using this knowledge you very briefly tell him or her how to account for the item. All relevant other information and exceptions etc. are only to be described if they’re applicable to your company.

Although the text is pretty much the same from year to year, the content plays big enough importance to the Annual Report. The idea behind disclosing relevant principles is about describing how every significant line item of the main financial statements are accounted for. Most important principles always present are revenue and receivables related, fixed assets accounting and taxation. Also financial liabilities and share capital. The rest is more dependent on what your company actually has as financial statement line items – does it have inventory or donations for an example? Keep it in mind, that only applicable principles should be disclosed and as such, only those that are significant. For an example, if you just had one rental agreement during the period, it’s hardly worth disclosing a rental agreement recognition policy unless it’s like significant and not like an agreement for renting office equipment or something similar.

It’s all about applicable and relevant principles and what’s also important, is to make sure that if some principles change, it’s to be disclosed as a part of the section as well. Not only the fact it changed, but also the impact of the change (retrospectively if needed also disclosing the initial and adjusted figures).

The accounting principles logically follow the main statements giving a starting ground to further understand the approach used to reach the figures. It’s explaining the detailed logic behind the figures from general point of view. What follow afterwards is company specific details of all significant balance on those statements.

If you want to learn more about Annual Report, please check out our Office ToDo UNI.