Disclosure Initiative: Definition of Material – Agenda Paper 11

Background         

The IASB’s Disclosure Initiative is focused on identifying ways to ensure that financial statements provide information that is relevant to investors that is communicated effectively. The Board thinks that the main problem is that preparers have difficulty in applying judgment when deciding what information to include in, or exclude from, the financial statements and the most effective way to organise and communicate it.

In 2017 the IASB published a proposal to amend the definition of material in IAS 1 and IAS 8. The comment period closed in January 2018.

At this meeting the Board discussed a general summary of the comments received on the exposure draft to amend the definition of material in IAS 1 and IAS 8. The Board was not asked to make any decisions.

Comment letter feedback—Exposure Draft: Definition of Material – AP11A

Staff analysis

Almost all respondents supported the proposed amendments to IAS 1 and IAS 8. However, some concerns about terminology were expressed.

Support for the proposals

Almost all respondents supported aligning the definition of material across IFRS publications and emphasising that materiality decisions require the exercise of judgement.

Some respondents said that when the Board aligns the definitions it should use the term ‘general purpose financial statements’, and not general purpose financial reports’ as it does in the Conceptual Framework.

Some respondents did not support the proposal to replace ‘users’ with ‘primary users’, because this is too narrow and financial statements should provide information to a wider range of users such as regulators and internal stakeholders. Other respondents supported the change, because ‘users’ is too broad. Some respondents suggested that a reference to the definition of ‘primary users’ in the Conceptual Framework could be made instead of including a definition in the Standard.

Replacing the threshold ‘could influence’ with ‘could reasonably be expected to influence’

Many respondents agreed with the proposed replacement of ‘could influence’ with ‘could reasonably be expected to influence’, as this might address concerns that the expression ‘could influence’ is too broad. Some other respondents thought that this term might be interpreted differently, across different jurisdictions, and that this may result in inconsistencies in how the definition of material is understood and applied in practice if not further explained by the Board.

Incorporating ‘obscuring information’ into the definition of material

Some respondents were concerned that the proposals imply that the inclusion of immaterial information in financial statements automatically results in material information being obscured and that it is unclear how to judge whether material information is obscured by immaterial information resulting in inconsistent application.

A few respondents thought that ‘obscuring’ is a subjective and complex concept that might make it difficult to determine if information is material, and to assess compliance with the definition of material. The example was not always thought helpful as it defines obscuring by referring to obscuring and is consequently too vague to provide helpful application guidance. The Board should provide a clearer definition of ‘obscuring’ and supplement this with illustrative examples and application guidance. A few respondents thought that the Board should consider removing the term ‘obscuring’ altogether and define material information more directly because the term ‘obscuring’ relates to the principles of faithful representation or communication of information, and not to whether that information is material.

A few respondents added that the meaning of the terms ‘omitting’ and ‘misstating’ are also unclear and suggested that the Board provide further explanatory paragraphs for each of these terms as well.

Location of the definition of material and explanatory paragraphs

Many respondents thought that the definition of material should not be repeated in multiple locations across the Standards but only fully defined in IAS 1 which would avoid repetition and reduce the risk of possible inconsistencies arising as IFRS Standards are revised.

Amendments to the Materiality Practice Statement and the revised Conceptual Framework

Respondents agreed with aligning the definition of material across all published IFRS documents. It was suggested that it would be useful to have the Conceptual Framework refer to the Materiality Practice Statement for explanations on how to make materiality judgements and that it would be appropriate to include any explanatory paragraphs about the definition of material in the Conceptual Framework and Materiality Practice Statement instead of in IAS 1 and IAS 8.

Other comments on the proposed amendments

It was suggested that the effective date of the amendments align with the effective date of other changes being made to IAS 8. In addition, entities should not be required to disclose any early application of the proposals as they do not fundamentally change the concept of materiality and there should be no impact on judgements made in the preparation of financial statements.

A few respondents notes that the term ‘material’ is used in different contexts in Standards. It is not always used in relation to the financial statements as a whole, which is the meaning the amendments focus on. It is sometimes used in narrower contexts or with a different purpose in mind.

Some respondents also thought that the Board should review the use of the terms ‘immaterial’ and ‘not material’ throughout IFRS Standards and additional guidance and use one term consistently, or clarify that the terms ‘immaterial’ and ‘not material’ have the same meaning.

A few respondents also suggested that the Board liaise with the International Auditing and Assurance Standards Board (IAASB) as they have a more detailed definition of materiality and that it would be helpful if the two definitions aligned.

Other feedback on the Materiality Practice Statement

Some respondents think the proposed amendments, together with the Materiality Practice Statement, have the potential to help address the behavioural issues identified in the Principles of Disclosure project. They suggested that they might improve entities’ understanding of the concept of materiality and increase their confidence in making materiality judgements.

Staff recommendations

The Board is being asked for feedback, but is not being asked to make any decisions.

Board discussion

The focus of the discussion was around the feedback relating to the word ‘obscuring’ within the definition of material. Board members had mixed views including keeping it in the definition, moving it to the guidance only, or removing it completely, along with the references to omitting and misstating.

A number of Board members proposed keeping the word obscuring either in the definition or in the supporting guidance but recommended that more work be undertaken by staff to understand the feedback and ensure that people will be comfortable with the meaning of the word. One Board member noted that this is not a new concept as it is already included in IAS1.38. Other Board members agreed that the word was required to counter-balance the potential for including too much information within the financial statements. Staff noted that the feedback showed that the issue is elevating it into the definition rather than including it in the guidance. One member said that obscure means to “cloud or conceal” and this is behavior that they want to discourage. So some reference should remain.

Some Board members suggested removing the words obscuring, omitting and misstating from the definition and having a positive, rather than negative definition, albeit they conceded that it was probably too late to amend the definition in this way. It was noted by a Board member that standard setters and accounting firms have asked to move to a positive definition in the past and that there is appetite for this. Staff were asked to analyse the merits of this proposal and whether it is feasible in the framework of this project.

One Board member also commented on the notion of a ‘specific reporting entity’ and asked Staff to clarify further why this is different to a ‘reporting entity’. Additionally they asked if the term ‘general purpose report’ should be used instead of ‘general purpose financial statement’ as the definition should be broader than just the financial statements. Another Board member added that the difference between the two definitions in this regard can clearly be explained given that IAS 1 only relates to financial statements and it can be made clear that this does not impact the definition itself. This could be in the basis for conclusions.

One Board member noted that it was a shame that no users responded to the Exposure Draft but agreed that a sensible approach would be to only include the definition in one place and to cross refer elsewhere.

Board members requested staff to provide analysis of the changes in relation to the new Conceptual Framework as the Exposure Draft in its current form considers the old Conceptual Framework due to timing. No impact is expected but the Board wish to confirm that this is the case.

The staff plan to bring additional papers back in May.