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FRC responds to IASB's consultation on draft materiality practice statement

  • FRC comment letter Image

04 Feb 2016

The Financial Reporting Council ("FRC") has published its response to the IASB's Exposure Draft IFRS Practice Statement: Application of Materiality to Financial Statements ("PS"). While the FRC welcome the IASB’s decision to issue guidance on the application of materiality, they are concerned that in its current form the PS will not meet its objectives to improve the quality and relevance of disclosures.

The IASB released its Exposure Draft in October 2015, with the objective of explaining and illustrating the concept of materiality and at helping preparers of financial statements in applying the concept. It covers three main areas:

  • characteristics of materiality;
  • presentation and disclosure in the financial statements; and
  • omissions and misstatements.

It also contains a short section on applying materiality when considering the recognition and measurement requirements of IFRSs.

In its response, the FRC express the view that to achieve this objective, the PS would need to be significantly more practical in approach, more accessible to the intended audience and provide guidance on additional matters with greater focus on the application of materiality to disclosures. They believe that the PS will be more successful in changing behaviour if it provides practical guidance, focussing on the thought processes and steps that preparers could follow when making materiality judgements, rather than reiterating and explaining the concept of materiality set out in existing IFRS literature. More detailed examples demonstrating how companies have applied this process in practice would also assist in this.

The FRC highlight a number of areas where, in their view, applying materiality is particularly challenging and it would be helpful for the PS to provide more guidance. They also express the view that it would be helpful if, as well as preparers, the PS also addresses stakeholders such as auditors, regulators and enforcers in its approach.

The FRC does agree with the IASB that a practice statement, rather than mandatory guidance, is the appropriate vehicle for a pronouncement on materiality, and also supports the IASB's intention to issue the PS as soon as possible and not to wait until the wider Principles of Disclosure project is completed.

The full comment letter can be obtained from the FRC website.

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