Background

The IASB initiated its disclosure initiative in December 2012 as part of its response to the Agenda Consultation 2011. In March 2014, a project on materiality was added to the disclosure initiative. The objective of the project is be to help preparers, auditors and regulators use judgement when applying the concept of materiality in order to make financial reports more meaningful. The final pronouncement the IASB is driving at is a Practice Statement, not a standard. Consequently, entities applying IFRSs are not required to comply with the Practice Statement, unless specifically required by their jurisdiction. Furthermore, non-compliance with the Practice Statement will not prevent an entity's financial statements from complying with IFRSs, if they otherwise do so.

Suggested guidance

The guidance proposed in ED/2015/8 IFRS Practice Statement - Application of Materiality to Financial Statements is intended to provide explanations and examples to help management apply the definition of materiality. The guidance 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 applying recognition and measurement requirements.

Characteristics of materiality. The PS builds on the definition of materiality in the Exposure Draft ED/2015/3 Conceptual Framework for Financial Reporting that states: "Information is material if omitting it or misstating it could influence decisions that the primary users of general purpose financial reports make on the basis of financial information about a specific reporting entity." It states that materiality is pervasive to the preparation of general purpose financial statements and needs to be considered in the primary financial statements as a whole. The IASB also concedes that judgement needs to be applied to assess whether information could reasonably be expected to influence decisions that its primary users make. The PS also notes that the assessment of whether information is material needs to be on both an individual and a collective basis and also needs an overall assessment and does involve assessing qualitative and quantitative factors.

Presentation and disclosure in the financial statements. The PS notes that in preparing the financial statements, management should consider the objective of providing information that is useful to users in assessing the prospects for future net cash inflows to the entity and in assessing its stewardship of the entity's resources. This objective provides the context for materiality judgements and may lead to different materiality assessments in different parts of the financial statement. The IASB proposes three steps - to assess what information should be presented in the primary financial statements, to assess what information should be disclosed within the notes (including assessment of appropriate emphasis), and then to review the financial statements as a whole - to ensure that the financial statements are a comprehensive document with an appropriate overall mix and balance of information. The IASB also states that an entity shall not reduce the understandability of its financial statements by obscuring material information with immaterial information or by aggregating material items that have different natures or functions, although it concedes that "IFRS does not prohibit entities from disclosing immaterial information".

Omissions and misstatements. The PS notes that the materiality of identified errors or omissions needs to be assessed individually and on basis of the financial statements as a whole. Material misstatements or omissions that offset each other still are considered material misstatements of the financial statements as such. The PS also states that intentionally made misstatements shall always be considered material.

Recognition and measurement. The PS notes that materiality considerations also apply to decisions not to apply a requirement in an IFRS when recording a particular item on grounds of the effect of not applying it being considered immaterial. It stresses that some entities might choose practical expedients for this reason. However, the PS states that IFRS recognition and measurement requirements need to be applied if their effect is material and that financial statements do not comply with IFRSs if they contain either material errors or immaterial errors made intentionally to achieve a particular presentation of an entity’s financial position, financial performance or cash flow.

Initial application and transition

Given the proposed PS is not a mandatorily applicable IFRS, it does contain neither a proposed effective date nor transition guidance. The IASB also notes that the PS may undergo further changes even after being finalised depending on developments in the conceptual framework project and the project on principles of disclosure.

Additional information

Please click for:

• IASB press release (link to IASB website)
• Access to the exposure draft on the IASB website
• IASB Snapshot publication explaing the PS
• Our IAS Plus project page on materiality

A summary of the agenda for the meeting is set out below:

Agenda papers for the meeting are available on the IASB's website.

ESMA considers the following key topics to be especially relevant for the examinations of listed companies' financial statements:

• impact of financial markets conditions on financial statements;
• statement of cash flows and related disclosures; and
• fair value measurement and related disclosures.

ESMA notes that these topics were chosen based on the recurrence of issues in the application of certain IFRS requirements identified when reviewing financial statements. They are also posing particular challenges in the current economic environment where some reference interest rates and the market prices of a number of commodities have decreased significantly and continue to be highly volatile while some exchange rates have fluctuated significantly.

ESMA and European national enforcers will monitor and supervise the application of the IFRS requirements outlined in the priorities, with national authorities incorporating them into their reviews and taking corrective actions where appropriate. ESMA will collect data on how European listed entities have applied the Priorities and will publish its findings in early 2017.

Please click for the following documents on the ESMA website.

• Press release
• Public statement on enforcement priorities, providing more background on each of the focus areas

The new documents ESMA has prepared to promote the implementation and to contribute to a harmonised EU application are:

• updated questions and answers on the Transparency Directive;
• a new standard form for disclosing the home member state;
• a new standard form for the notification of major holdings; and
• the indicative list of financial instruments subject to notification requirements. 

The documents are available through the press release on the ESMA website.

Meeting activities included the following:

• Executive session— The Trustees discussed a number of important strategic issues:
  • Meeting with the Chinese Assistant Minister of Finance — Prior to the Trustees' meeting there had been a meeting with the Chinese Assistant Minister of Finance which discussed convergence and support for the IFRS Foundation and its work. The meeting was described as having been very encouraging.
  • Strategic overview — The Trustees discussed a proposed framework and suggested success metrics for measuring the Foundation’s performance against its strategic goals. The Trustees commended the staff for its efforts but noted that the proposals focused on seeking to develop measures of the organisation’s effectiveness. The Trustees stressed the need to also look at measures of the organisation’s efficiency, as well as looking at the resources and inputs available to the Foundation.
  • Funding — The Trustees noted that several new jurisdictions have started to fund the Foundation and that several other jurisdictions have increased their contributions. However, there are still jurisdictions that fund below the contribution that might be expected for the size of the economy or that do not fund the Foundation at all. The Trustees also acknowledged and appreciated the efforts that had been made to increase the organisation’s reserves towards the target of a full year’s expense level over the next few years.
  • Communications strategy — The Trustees discussed how the Foundation might better align its communications and stakeholder engagement activities with its strategic goals.
  • International developments — The Trustees were encouraged by the increased voluntary adoption of IFRS in Japan, noted the overall positive outcome of the European Commission’s review of the IAS Regulation and the positive EFRAG endorsement advice on IFRS 9, and discussed the on-going situation with regard to the USA.
• IASB Chairman’s report — The Vice-Chair of the IASB provide the Trustees with an update on a number of the IASB’s technical activities, on behalf of the Chair.
  • Major projects — On insurance contracts, the IASB expects to finish redeliberations until the end of 2015, with the standard itself expected in 2016. The extension of the original timetable means that the mandatory effective date for the standard would be later than that for IFRS 9. Given stakeholders concerns about the implications of this the IASB plans to propose two approaches (the overlay approach and the deferral approach) later in 2015. On leases, the forthcoming standard is currently being drafted and is expected to be published before the end of 2015.
  • Engagement strategy — The IASB's Investors in Financial Reporting programme has received positive reactions, with support from the investment community and others, and will be reviewed at the end of 2015.
  • Use of IFRS globally and consistency of application — The Trustees noted the state of IFRS adoption around the world as evidenced in the IFRS Foundation's jurisdiction profiles. On consistent application, the Trustees were informed of the progress of the work of the transition resource groups on revenue recognition and the impairment of financial instruments. The Trustees were reminded that it is not the IASB’s intention to always establish a transition resource group when a standard is published. Rather, this would be considered on a case-by-case basis.
• Report of the Due Process Oversight Committee (DPOC) — The Trustees received a report about the DPOC’s October 2015 meeting. For more information, see our related news item.
• Stakeholder event — The IFRS Foundation hosted an event 'IFRS and China: Ever-changing Challenges and Opportunities' which saw several speeches and a panel discussion.

The full report on the IFRS Foundation trustees’ meeting is available on the IASB’s website.