The Board published the exposure draft IFRS Practice Statement: Application of Materiality to Financial Statements in October 2015 (the ‘ED’) and the Board discussed some of the issues raised by respondents in its October 2016 meeting. The purpose of this session is to discuss the following topics raised by respondents and to consider what changes, if any, should be made to the final Practice Statement (‘PS’) in light of the comments received:

• (a) Errors - Agenda paper 11A
• (b) Covenants - Agenda paper 11B
• (c) Stewardship - Agenda paper 11C
• (d) Recognition and measurement - Agenda paper 11D
• (e) Entities applying the IFRS for SMEs Standard - Agenda paper 11E
• (f) Status and form of the guidance - Agenda paper 11F

Appendix A provides some background information on the Materiality project and Appendix B provides a summary of the tentative decisions that the Board has made to date.

Next steps

In the December 2016 Board meeting, the Staff intends to ask the Board to re-deliberate the application of materiality to prior period information. The Staff intends to complete all the technical deliberations at that meeting.

Disclosure Initiative: Materiality – Errors - Agenda paper 11A

Background

Some respondents asked for more practical guidance on assessing when errors are material to the financial statements. Specifically, several respondents asked for guidance on cases when the cumulative effect of previously immaterial errors becomes material in the current period - they asked whether an entity should correct those errors by restating prior period information. Some respondents also noted that the ED is inconsistent with IAS 8.41 where the former states that errors made intentionally to achieve a particular result are always material.

Staff analysis and recommendation

The Staff recommends the following:

1. Suggesting in the PS that entities apply the Materiality Process (see Agenda Paper 11D of the October 2016 meeting) in order to assess whether an error is material.
2. Clarifying that the assessment of the materiality of a cumulative error should be performed on the basis of the conditions existing at the time the financial statements for the current period are authorised for issue.
3. Removing the wording implying that if management intentionally misstates information to achieve a particular result, such errors are always material.
4. Including a reminder that IAS 8.41 requires an entity to correct all errors made intentionally to achieve a particular presentation, regardless of their materiality.

Disclosure Initiative: Materiality – Covenants - Agenda paper 11B

Background

Respondents asked for more guidance on what are the circumstances that would make information about a covenant or a breach of covenants material.

Staff analysis and recommendation

The Staff recommends that the PS include specific guidance on:

1. how to assess the materiality of information about the existence and the terms of a covenant, or a breach of covenant; and
2. how the existence of a covenant affects the materiality assessment of the factors triggering the covenant.

In making the above assessments, the Staff recommends that an entity consider:

• (a) the materiality of the consequences of the covenant breach on the entity’s financial position, financial performance and cash flows; and
• (b) the likelihood of the breach occurring.

Disclosure Initiative: Materiality – Stewardship - Agenda paper 11C

Background

A few respondents asked the Board to clarify how the consideration of stewardship affects the materiality assessment.

Staff analysis and recommendation

The Staff recommends the following:

1. Including guidance in the PS to remind entities that information about how efficiently and effectively management discharges their responsibilities can be material.
2. Including an additional qualitative factor regarding stewardship in Step 2 of the Materiality Process (see Agenda Paper 11D of the October 2016 meeting).

Disclosure Initiative: Materiality – Recognition and measurement - Agenda paper 11D

Background

The ED contains a small section on the application of materiality in the context of the recognition and measurement of information. Respondents provided mixed feedback on the usefulness and appropriateness of including such a section in the PS. While some believed that more comprehensive guidance should be provided, others believed that this is not an area of pressing need or that the PS should focus exclusively on presentation and disclosure matters.

Staff analysis and recommendation

The Staff recommends the following:

1. Retaining the guidance on the application of materiality in the context of recognition and measurement but including the guidance throughout the PS, as opposed to in a separate section. The Staff believes that providing guidance on applying materiality in both a recognition and measurement context and a disclosure and presentation context on a topic by topic basis will be more helpful.
2. Including a description of the materiality practical expedients in the PS and describing the discipline that underlies the use of these practical expedients. That is, the entity should have a basis to reasonably expect that the effects on the financial statements of applying the expedients would not differ materially from not applying the expedients.

Disclosure Initiative: Materiality – Entities applying the IFRS for SMEs Standard - Agenda paper 11E

Background

The ED is addressed only to entities applying full IFRS. This has led a few respondents to ask whether the PS should be made applicable to entities applying IFRS for SMEs.

Staff analysis and recommendation

The Staff recommends the following:

1. That the PS not be addressed to entities applying IFRS for SMEs. This is because the PS focuses on primary users of financial statements prepared using full IFRS. Their perspective may differ from the perspective of primary users of financial statements prepared using IFRS for SMEs.
2. Stating in the PS that some of the guidance in the PS might be useful in preparing financial statements in accordance with IFRS for SMEs.

Disclosure Initiative: Materiality – Status and form of the guidance - Agenda paper 11F

Background

The purpose of this paper is to ask the Board to confirm the publication of the guidance on materiality as a non-mandatory (as opposed to mandatory) guidance in the form of a practice statement (as opposed to other forms e.g. educational material).

Staff analysis and recommendation

The Staff recommends that the Board finalise the guidance in the form of a non-mandatory practice statement. This is in view of the feedback received and further analysis that indicates that a practice statement is the form that combines greater advantages and fewer disadvantages compared to other alternatives.