Valuation looks like a number on a spreadsheet. A clean figure, maybe the result of a fancy formula. But under that number is a whole set of decisions, some big, some small, that shape the final outcome. Many of these decisions come from accounting policies.
Now, for anyone in finance, accounting, or leadership, understanding how accounting policies and valuation connect isn’t optional. It’s essential. The wrong assumption or overlooked detail can shift a company’s perceived worth by millions.
If you’re working toward senior financial roles or already managing high-stakes numbers, a structured CFO course can prepare you to ask the right questions and lead with insight, not just instinct.
Let’s look at how accounting policies affect business valuation, with tables, examples, and key concepts explained simply.
What Are Accounting Policies?
Accounting policies are the rules and guidelines that a company follows when preparing its financial statements. These aren’t just methods—they reflect how a business reports everything from revenue to depreciation to taxes.
While standards like IFRS and GAAP provide the framework, there’s room for choice. And that choice can shape how a company looks on paper.
| Area of Policy | Common Methods | Example Impact on Valuation |
| Depreciation | Straight-line vs. reducing balance | Affects asset value and profits |
| Inventory Valuation | FIFO vs. Weighted Average | Impacts cost of goods sold and margin |
| Revenue Recognition | Point-in-time vs. over-time | Changes timing of reported income |
| Expense Capitalisation | Capitalise vs. expense immediately | Alters profit and asset base |
| Provisioning for Bad Debt | Conservative vs. aggressive provisioning | Impacts net receivables and EBIT |
Understanding what are accounting policies, and how different approaches work, is the first step to spotting how they affect business valuation.
Accounting Policies and Valuation: What’s the Link?
Business valuation often depends on financial metrics like earnings, EBITDA, net assets, or future cash flows. These are all shaped by accounting decisions. Here’s how:
- EBITDA can look higher if depreciation is delayed or reduced.
- Net income can fluctuate depending on when revenue is recognised.
- Asset value may change based on inventory and depreciation methods.
- Liabilities can be understated if future risks aren’t adequately provisioned.
That’s why two similar companies, with the same revenue, may have different valuations because they treat expenses, income, and risk differently in their books.
Valuation Methods and Accounting Sensitivity
| Valuation Method | Impact of Accounting Policy Choices |
| EBITDA Multiple | Influenced by depreciation, provisioning, leases |
| Net Asset Method | Affected by capitalisation, depreciation |
| DCF (Discounted Cash Flow) | Depends on revenue recognition, tax treatment |
| Book Value | Directly shaped by all accounting policy decisions |
The more aggressive the accounting, the more inflated the earnings may appear, especially in the short term. That’s why understanding accounting policies and valuation together is so crucial.
Real-World Scenarios That Show the Impact
Scenario 1: Tech Startup Revenue Timing
Two SaaS companies both sign a ₹1 crore annual contract.
Company A recognises the full amount upfront.
Company B spreads it over 12 months.
Result? Company A shows a profit bump this quarter. Looks more valuable to investors. But the underlying cash flow hasn’t changed. This timing difference can distort valuation if you don’t adjust for it.
Scenario 2: Inventory in Inflationary Times
Company X uses FIFO.
Company Y uses weighted average.
When input costs rise, FIFO makes Company X’s cost of goods sold appear lower, increasing its gross margin. Looks great on paper—until someone realises it’s a temporary effect.
These aren’t just accounting quirks. They directly affect decisions around M&A, funding, and investment.
How Analysts Adjust for Accounting Policies
When valuing businesses, analysts rarely take financials at face value. Instead, they make normalisations.
Here’s what they might adjust:
- Change depreciation to standard rates for comparison
- Adjust one-time gains or losses out of earnings
- Convert revenue recognition to a consistent policy
- Estimate provisions if the current ones seem too lenient
- Recalculate inventory values for a fair cost structure
Such adjustments are based on the principle of substance over form. What matters is economic reality, not just how it’s reported.
Investor Perspective: Why This Matters
Investors care about consistency and comparability. If one company books revenue early and another spreads it out, direct comparison becomes misleading.
That’s why:
- Private equity firms often rework EBITDA before finalising deals
- Public market analysts strip out certain accounting choices to level the field
- Auditors may flag aggressive or inconsistent policies as red flags
In short, accounting policies tell a story, and smart investors always read between the lines.
CFO’s Role in Accounting Policy Decisions
CFOs play a key role in setting and communicating accounting policies. The choices made here reflect a company’s culture, risk appetite, and transparency.
Key CFO duties include:
- Ensuring policies match the business model
- Aligning with auditors on complex areas
- Reporting changes clearly in financial statements
- Explaining policy impacts to investors and the board
A strong CFO doesn’t manipulate policies—they manage them responsibly and use them to signal trust.
Conclusion
Accounting policies shape financials, and financials shape valuation. If those policies aren’t clearly understood, comparisons fall apart. Investments become risky. And decisions get made on shaky ground.
Whether you’re a CFO, investor, analyst, or founder, knowing how accounting policies and valuation connect can give you an edge. Because what you see on the balance sheet isn’t always the whole story.
Strong financial leadership means asking the right questions—and sometimes, challenging the numbers you’re handed. For those ready to lead with clarity, courses like the CFO course by Imarticus Learning can help you get there.
Frequently Asked Questions
What are accounting policies in simple terms?
They’re the rules a company uses to prepare its accounts. These rules decide how revenue, costs, and assets are recorded.
Why do accounting policies affect valuation?
Because they change how profits and assets appear. Small changes in policies can make a big difference in how valuable a business seems.
Can companies choose their own accounting policies?
Yes, within the limits of accounting standards like IFRS or GAAP. This flexibility means comparisons can get tricky without adjustments.
What’s the difference between accounting policies and estimates?
Policies are the methods used (e.g., straight-line depreciation). Estimates are the inputs (e.g., useful life of an asset).
Do changes in accounting policy need to be disclosed?
Yes. Companies must explain the change and its impact on financials in their annual reports.
How do investors adjust for different accounting policies?
They normalise figures, adjusting earnings or assets to make fair comparisons across companies.
Should CFOs manage or control accounting policy choices?
They should guide decisions, ensuring consistency, transparency, and alignment with business reality, not use policies to window-dress numbers.