Acquire a copy of the printed sheet music for the folk song you want to arrange, if possible. Some musicians simply arrange by ear. If you can hear music well enough to do this, you won't need a copy of the sheet.
Compare the instruments used in the original song to the instrumentation you have to work with for your arrangement to break down the folk song you want to arrange. Folk songs usually have an acoustic guitar. Some have two, or maybe an electric guitar. Other instruments found in many folk songs include bass, some type of whistle, harmonica, tambourine, piano and percussion. If you're arranging the song for a rock band, you will have to make instrumentation choices.
Arrange acoustic and electric guitar parts in the same way as they are used in the original composition. If you have two guitars to work with and the folk song you're arranging has a guitar and a harmonica part, you can typically arrange harmonica for your lead guitar. The same rule applies with a whistle or violin part.
Arrange the tempo or time signature of the song. A laid-back mid-tempo folk song might be arranged at a faster tempo than the original, such as the Thin Lizzy cover of the Irish folk tune "Whiskey in the Jar." You can change the sound of the song when it's recorded in the studio, but the basics of timing and tempo are handled during the arrangement process.
Strip away everything but the chord strums and the melody line if you're arranging a folk song for a simplified version on guitar. To arrange the same song for piano, place a simplified version of the bass on the bass clef of the piano and two- or three-note chords on the treble clef. Include guitar chord diagrams over the melody line and lyrics. Typical simplified arrangements follow this set up.