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Disclosure initiative – Materiality

Date recorded:

The project manager introduced the agenda paper and said that one of the core problems of disclosure was how to apply the concept of materiality. She said that there was a lot of non-entity specific information in financial statements. She said that this was why they had started a project to produce general application guidance or maybe other guidance for materiality. She said that they had sought views from ASAF, CMAC and GPF whether they should proceed with such a project. While ASAF and CMAC had been broadly supportive, the GPF had raised concerns that materiality would primarily be about behaviour. They believed that this behaviour could be influenced by guidance only to a certain degree. The project manager asked the Board whether they agreed that

  • a project on materiality should be undertaken;
  • the objective was to help preparers, auditors and regulators in using judgment when applying materiality and make discussions between those parties more effective; and
  • the project should address materiality in the financial statements as a whole with a particular focus on the notes.

One Board member agreed that the project should clarify how the concept of materiality should be applied. However, he cautioned the Board not to tinker with words that described materiality, as this would be an entirely different and wider project, which, in his view, would not improve the application of the concept. The project manager replied that there were many aspects of materiality. She said that people had different understandings of materiality and that staff wanted to help people understand what the concept meant rather than changing the concept itself.

One Board member said that the scope should be kept under control by dealing only with materiality being applied to disclosures in the notes, if possible, and not dealing with materiality with regard to errors or misstatements or when recognising transactions. The project manager replied that this was consistent with some of the messages they had heard.

Another Board member said that the project was hard to stop at this stage. He said that he was not happy with the word “help” in the objective as judgement was at some level subjective, and he did not see how people could be helped using judgement in a consistent way, as it was a behavioural problem. He was also not sure what the final product of the project should be. He could only think about education material or a practice statement but not a Standard or an Interpretation. The project manager replied that it was hard to tell at this point what the final product would be. She said that they had prepared a research paper which could be issued as educational material. She said that they did not want to tie the project to a certain end product.

One Board member supported the conclusions and recommendations. She said that the most important area the project should focus on was the lack of guidance on the application of materiality to disclosures in the notes. She said that the IAASB and IOSCO were important groups, but that IFIAR should also be involved since many recent comments on materiality had arisen from discussions with audit regulators.

Another Board member supported the project with a narrow focus on note disclosures. He said that there needed to be a clear objective on disclosures.

One Board member supported the project and said that while materiality in the financial statements was regarded more a quantitative threshold, materiality in the notes was rather seen as a qualitative threshold.

The project manager summarised that the Board wanted to go ahead with the project. She said that they would also look into accounting policies. The chairman confirmed this.

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