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Disclosure initiative

Date recorded:

Accounting Policies—Significance and materiality (Agenda Paper 11A)

Background

In the July 2018 meeting the Board decided to develop guidance and examples for IFRS Practice Statement 2: Making Materiality Judgements (Materiality Practice Statement) which would help preparers in deciding what to disclose as ‘significant’ accounting policies, as required by IAS 1 Presentation of Financial Statements, in their financial statements.

In the October 2018 meeting there were concerns expressed by a few Board members around whether it is possible to apply the concept of materiality to accounting policies and whether the application of materiality would lead to too many or too few policies being disclosed.

Staff analysis

The paper discussed two main areas:

  1. How materiality can be applied to accounting policy disclosure—The assessment of materiality in relation to accounting policies should be made relative to the financial statements taken as a whole. This is true of other individual disclosure items and in the case of an accounting policy might be material as it provides information that enables a user to understand a material item in the financial statements. This interpretation of materiality is supported by the Materiality Practice Statement. Additionally, in relation to the application of materiality, staff have addressed the following questions:
    • Could application of the concept of materiality to accounting policy disclosure result in a loss of useful information?
    • Is it onerous to require entities to disclose their material accounting policies?
    • Regulatory concerns including restatements relating only to accounting policy disclosures.
  2. Whether to define the concept of significance or whether to replace the concept with materiality as per IAS 1 in determining which accounting policies to include in the financial statements including the following:
    • Defining significance—Staff would develop a definition and explanatory paragraphs to be included within the Standard, which would explain what makes an accounting policy significant and how this differs from materiality. This would avoid the concerns above but is not recommended as it may not prevent confusion over the difference between significance and materiality and there is a risk of unintended consequences as the term ‘significant’ is widely used.
    • Replacing significance with materiality—The staff see this as a better alternative as it will eliminate the confusion between significance and materiality and guidance in the Materiality Practice Statement would help entities exercise more effective judgement.

Staff recommendations

Staff recommended that the Board amend paragraphs 117–124 of IAS 1 to require entities to disclose their material accounting policies rather than their significant accounting policies. This amendment would be issued together with the guidance and examples being developed for inclusion in the Materiality Practice Statement.

Board Discussion

The majority of Board members agreed with the staff recommendation as materiality is a clearly defined concept and defining the term ‘significant’ could lead to unintended consequences. Additionally, some Board members expressed a view that a change was needed in order to change behaviour with regards to boilerplate policies.

The Vice-Chair also supported the recommendation despite concerns that it may lead to fewer policies being disclosed than anticipated as this issue could be tested at the comment stage.

One Board member expressed concern about whether the change to only include accounting policies on material items may be a major change from the current requirements. Staff clarified that material items includes quantitatively and qualitatively material so this should not be a major change.

A dissenting Board member did not agree with the staff recommendation as policies should be treated differently to other information within the financial statements. He expressed concern that not all users are sophisticated and that not all Directors are accountants and that useful information could be lost. He suggested an alternative approach to the issue of boilerplate policies such as requiring an executive summary for changes to policies each year.

Another Board member argued that information in financial statements should not include publicly available information and that the Conceptual Framework refers to knowledgeable users. As such, the role of the financial statements should not be to educate users.

Board Decisions

13 Board members voted in favour of the change in wording in IAS 1.

Correction list for hyphenation

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