Every filing carries a policies note ("Note 1"/"Note 2: Significant/Material accounting policies"). It typically runs 10–20 pages, and perhaps two of them matter. You learned the accounting across the last twelve weeks. Now you're reading for one thing: where did management have a choice, and which way did they lean?
What should you check in the policies note?
Here are the eight policies worth checking, and what to look for in each:
| Policy | What to check | Aggressive tilt looks like |
|---|---|---|
| Revenue recognition | Point-in-time vs over-time; gross vs net (principal/agent); multiple-element allocation; when exactly "control transfers" | Recognizing on dispatch to distributors (channel-stuffable); gross presentation of pass-through revenue; long percentage-of-completion contracts |
| Depreciation & useful lives | Lives vs peers; residual values; any life extension this year | Lengthening lives (an airline moving airframes from 20 to 30 years cuts depreciation ~a third); high residual values |
| Inventory | FIFO/weighted-average (LIFO US-only, M1.06); what's in "cost"; NRV write-down policy | Capitalizing more overhead into inventory; slow write-downs |
| Capitalization | What gets capitalized: development costs (IFRS/Ind AS), borrowing costs, software, customer-acquisition | Capitalizing what peers expense — profits now, assets that must be tested later |
| Impairment testing | CGU definition, discount rates, growth assumptions (in the estimates note) | Few, large CGUs (losses hide in aggregation); optimistic terminal growth |
| Expected credit losses | Provisioning matrix, staging policy | Coverage ratios falling while receivables age |
| Leases | Discount rates, lease-term judgments (extension options) | Short assumed terms shrink the liability |
| Consolidation scope | Which entities are consolidated vs equity-accounted; any "control without majority" or "no control despite majority" judgments | Losses parked in unconsolidated associates; structured entities off the sheet |
Try the policy-diff trick. Open this year's policies note and last year's side by side, in two browser tabs. Any change gets disclosed as a change in accounting policy or estimate, but the quietest ones take up one sentence. Think of a useful-life tweak or a provisioning-matrix reshuffle. If a policy changes in the same year the company barely met guidance, treat it as no coincidence until proven otherwise. Estimate changes are applied prospectively with no restatement. That makes them the preferred earnings lever. You learned the mechanics with long-term assets. Now you learn to catch the act.
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Worked example: how useful lives change profit
A synthetic, illustrative example shows how big this gets. Two Indian logistics companies each own ₹1,200 crore (gross) of trucks. Company A depreciates them over 8 years and Company B over 12. That puts annual depreciation at ₹150 crore for A and ₹100 crore for B. It's the same fleet with the same economics, yet B reports ₹50 crore (pre-tax) higher profit every year until replacement capex tells the truth. Nothing on the face of the P&L reveals it. Your only defense is to read the policy note and normalize, which Phase 2 does formally.