Financial Reporting · Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Ind AS 8: Selection and Application of Accounting Policies

Updated 5 October 2026 · Fact-checked

Accounting policies are the specific principles, bases, conventions, rules and practices an entity applies in preparing financial statements. Where an Ind AS applies to a transaction, you follow it. Where none applies, management uses judgement and refers to a set hierarchy. Policies must then be applied consistently to similar items.

Understand Selection and Application of Accounting Policies

Accounting policies are the specific principles, bases, conventions, rules and practices an entity applies in preparing and presenting financial statements. Examples are the cost formula for inventory, the depreciation method, and the model used for PPE after recognition. Do not confuse them with estimates. A policy is the method chosen. An estimate is a number produced by applying the method, such as a useful life.

The first rule is simple. When an Ind AS specifically applies to a transaction, other event or condition, the policy is determined by applying that Ind AS. You also consider any relevant Implementation Guidance issued with it. Ind AS policies need to be applied only to material items. Immaterial items can be treated differently, but you must not make or leave uncorrected immaterial departures to achieve a particular presentation.

Sometimes no Ind AS covers the item. Then management uses its judgement to develop a policy that gives information that is relevant to the economic decision-making needs of users and reliable. Ind AS 8 (para 10) lists the attributes of reliable information: the financial statements represent faithfully the financial position, financial performance and cash flows, reflect economic substance and not merely legal form, are neutral (free from bias), are prudent and are complete in all material respects.

Prudence does not permit deliberate bias. You cannot use it to justify deliberate understatement of assets or income, or overstatement of liabilities or expenses. That would breach neutrality.

In making that judgement, management refers to, and considers the applicability of, these sources in descending order: (a) Ind AS dealing with similar and related issues; (b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework. Management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework, other accounting literature and accepted industry practices, to the extent these do not conflict with the sources above.

Finally, consistency. An entity selects and applies its policies consistently for similar transactions, other events and conditions. The exception is where an Ind AS specifically requires or permits categorising items so that different policies may be appropriate. In that case, you choose an appropriate policy for each category and apply it consistently within the category. A change in policy is allowed only on the conditions in Ind AS 8, covered in the topic on changes in accounting policies.

Key rules to remember

Definition of accounting policies: Accounting policies = specific principles, bases, conventions, rules and practices applied in preparing and presenting financial statements; A policy is the method chosen. An estimate is a measurement outcome of applying that method.
Rule 1: An Ind AS applies: Policy = as per the Ind AS (with relevant Implementation Guidance); Applies to material items. Do not choose a policy that conflicts with a specific Ind AS.
Rule 2: No Ind AS applies: Management judgement → relevant and reliable information (Ind AS 8, para 10); Para 10 lists the attributes of reliable information: faithful representation, substance over form, neutrality, prudence and completeness in all material respects. Prudence does not permit deliberate bias or understatement.
Hierarchy of sources (descending order): (a) Ind AS on similar and related issues → (b) Conceptual Framework definitions, recognition criteria and measurement concepts; Then, optionally, other standard-setters with a similar framework, other accounting literature and accepted industry practice, if no conflict with (a) and (b).
Consistency: Same policy for similar transactions, events and conditions; Different policies are allowed only where an Ind AS requires or permits categorisation, and then consistently within each category.

How to solve Selection and Application of Accounting Policies questions

Use this sequence for any question on selecting accounting policies. Write it in provision, facts, conclusion form.

1Identify the transaction or event and ask whether it is a policy question or an estimate question.
2Check whether a specific Ind AS deals with it. If yes, apply that Ind AS and its implementation guidance, and stop.
3If no Ind AS covers it, state that management must use judgement to give relevant and reliable information.
4Go down the hierarchy in order. First look at Ind AS dealing with similar and related issues. Then use the Conceptual Framework definitions, recognition criteria and measurement concepts.
5Where useful, mention that other standard-setters' pronouncements, accounting literature and industry practice may be considered if they do not conflict with the higher sources.
6Check consistency. Are similar items treated alike? Is any categorisation permitted by an Ind AS?
7Conclude with the policy chosen, the reason, and any disclosure needed for significant policies and judgements.

Quickest way: Three-gate check

When to use it: Use this for short MCQs and for 4 to 5 mark written answers when time is tight.

Gate 1: Is there a specific Ind AS? If yes, follow it.
Gate 2: If not, go down the hierarchy: similar Ind AS first, then Conceptual Framework.
Gate 3: Apply the chosen policy consistently to similar items.
In MCQs, reject options that put industry practice or another country's standard above Ind AS or the Conceptual Framework.

Common mistakes in Selection and Application of Accounting Policies

Treating industry practice as the first source when no Ind AS applies.
Students remember that practice matters but forget the order of the hierarchy.
Fix: Remember that industry practice and other literature are optional and come after Ind AS on similar issues and the Conceptual Framework. They cannot conflict with those.
Calling a change in useful life or depreciation rate a change in policy.
Both relate to depreciation, so the line between method and estimate blurs.
Fix: Ask whether the measurement basis changed (policy) or only the input in the same basis (estimate).
Applying different policies to similar transactions without a reason.
Students think the entity can choose what suits each case.
Fix: Policies must be consistent for similar items. Different policies need an Ind AS that requires or permits categorisation.
Skipping Implementation Guidance when an Ind AS applies.
Students focus on the standard text alone.
Fix: State that the entity considers relevant Implementation Guidance issued with the Ind AS.
Saying an immaterial item must follow every Ind AS policy rule rigorously, or that immaterial departures may be made deliberately.
Students half-remember the materiality sentence.
Fix: Policies need not be applied to immaterial items. But you must not make, or leave uncorrected, immaterial departures to achieve a particular presentation.
Choosing the policy only because it is the most prudent or convenient, or using prudence to justify deliberate understatement.
Students link prudence with conservatism and treat it as a licence to understate.
Fix: The test is relevant and reliable information. Ind AS 8 (para 10) lists prudence among the attributes of reliability, alongside neutrality and the others. Prudence does not permit deliberate bias. Deliberate understatement of assets or income, or overstatement of liabilities or expenses, is not consistent with neutrality.

Worked examples

Example 1

Case: Greenleaf Ltd, an Ind AS company, receives ₹50,00,000 from a private industry consortium for committing to hold a tradeable allowance in a voluntary sustainability scheme for 5 years. The amount is refundable pro rata if Greenleaf leaves the scheme early. Assume that, after analysis, the receipt is outside the scope of Ind AS 20 (the payer is not a government), Ind AS 37 (it is not a provision question) and Ind AS 115 (Greenleaf is not supplying goods or services from its ordinary activities to a customer), and that no other Ind AS specifically deals with it. The accountant says, 'Industry practice is to recognise the full receipt as income immediately, so we will do the same.' Advise on how the policy should be selected.

Show the solution

Provision: If no Ind AS specifically applies, management uses judgement to develop a policy giving relevant and reliable information.
Provision: Management refers first to Ind AS dealing with similar and related issues, then to the Conceptual Framework definitions, recognition criteria and measurement concepts.
Facts: The accountant started from industry practice, which is not the first source.
Application (similar issues): Ind AS 20 recognises grants in profit or loss on a systematic basis over the periods in which the related costs are recognised. Ind AS 115 recognises revenue as performance obligations are satisfied. By analogy, neither standard recognises such amounts as income simply on receipt.
Application (Conceptual Framework): The liability definition is a present obligation to transfer an economic resource as a result of a past event. Because the amount is refundable pro rata on early exit, the unearned part is still an obligation of Greenleaf. This supports deferral: a liability on receipt, with income recognised as the obligation falls away.
Application (numbers): Assume, for this case, that the commitment is held evenly, so the obligation falls away on a straight-line basis over 5 years. This is an assumption, not a result of the hierarchy. ₹50,00,000 ÷ 5 = ₹10,00,000 is released to income each year. At the end of year 1, ₹10,00,000 is income and ₹40,00,000 is still a liability.
Industry practice can be considered afterwards, but only if it does not conflict with those sources. Here, immediate recognition of the full amount conflicts with them.

Answer: The policy cannot be chosen by industry practice alone. Following the hierarchy, Greenleaf should treat the ₹50,00,000 as a liability on receipt and release it to income as the obligation falls away. On the assumption of an even 5-year commitment, ₹10,00,000 is income each year and ₹40,00,000 remains a liability at the end of year 1. Immediate recognition of the full amount is not supported.

Example 2

Case: Sunrise Ltd values its raw materials for its Pune plant using FIFO and for its identical raw materials at its Chennai plant using weighted average. The items are of the same nature and use. Management says each plant manager is free to choose. Evaluate this under Ind AS 8.

Show the solution

Provision: Ind AS 8 requires an entity to select and apply its accounting policies consistently for similar transactions, other events and conditions.
Exception: Different policies are acceptable only if an Ind AS specifically requires or permits categorising items so that different policies may be appropriate.
Facts: The raw materials are similar in nature and use. Ind AS 2 does allow different cost formulas only for inventories with a different nature or use.
Application: Since nature and use are the same, the different formulas are not justified by location alone.
Conclusion: Sunrise should apply a single cost formula to both plants.

Answer: The different formulas are not acceptable. Inventories of similar nature and use must use the same cost formula. Sunrise should adopt one formula, FIFO or weighted average, for both plants.

Exam tips

In written answers, name the hierarchy in order. Marks usually go for the sequence: Ind AS on similar issues, then Conceptual Framework, then optional sources.
In case MCQs, first decide whether the question is about a policy or an estimate before reading the options.
Quote the two tests for management judgement: relevant to decision-making and reliable.
When a case shows inconsistent treatment of similar items, look for an Ind AS that permits categorisation before you conclude it is wrong.
Link this topic to changes in accounting policies. A question often starts with selection and moves to whether a later change is allowed.

Practice questions from Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Selection and Application of Accounting Policies in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Selection and Application of Accounting Policies: frequently asked questions

What is an accounting policy under Ind AS 8?

It is the specific principles, bases, conventions, rules and practices an entity applies in preparing and presenting financial statements. Examples are the inventory cost formula and the depreciation method. It is different from an accounting estimate, which is a monetary amount subject to measurement uncertainty.

What if no Ind AS applies to a transaction?

Management uses its judgement to develop a policy that gives relevant and reliable information. It refers first to Ind AS on similar and related issues, then to the Conceptual Framework. It may also consider other standard-setters, accounting literature and industry practice if they do not conflict.

Can an entity use different policies for similar items?

No. Policies must be applied consistently to similar transactions, events and conditions. The only exception is where an Ind AS requires or permits categorisation, and then each category must be treated consistently.

Do Ind AS policies apply to immaterial items?

Accounting policies in Ind AS need not be applied when the effect of applying them is immaterial. However, you must not make, or leave uncorrected, immaterial departures from Ind AS to achieve a particular presentation of financial position, performance or cash flows.