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IASB publishes proposed amendments to IAS 1 and IAS 8 regarding the definition of materiality

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14 Sep 2017

The International Accounting Standards Board (IASB) has published an exposure draft 'Definition of Material (Proposed amendments to IAS 1 and IAS 8)' to clarify the definition of ‘material’ and to align the definition used in the Conceptual Framework and the standards themselves. Comments are requested by 15 January 2018.

 

Background

The materiality project arose as part of the IASB's Disclosure initiative started in 2012. The first document published as part of this project was the May 2013 feedback statement Discussion Forum – Financial Reporting Disclosure, which outlined the IASB's intention to consider a number of further initiatives, including a project on materiality, seeking to develop application guidance or educational material on materiality, with input from an advisory group.

A draft practice statement on materiality was published on 28 October 2015, however, subsequently it became clear that some of the proposed guidance needed to be authoritative to have the desired effect, so the project was split up into a part that would see a practice statement published and a part that was intended to result in amendments to IAS 1 and IAS 8. Both, the final practice statement and the exposure draft of proposed amendments were published today. Please click for more information about Practice Statement 2 Making Materiality Judgements.

 

Suggested changes and reasoning behind the changes

The changes proposed in ED/2017/6 Definition of Material (Proposed amendments to IAS 1 and IAS 8) all relate to a revised definition of 'material' which is quoted below from the ED:

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of a specific reporting entity’s general purpose financial statements make on the basis of those financial statements.

Three new aspects of the proposed definition should especially be noted:

  • Obscuring. The existing definition only focused on omitting or misstating information, however, the Board concluded that obscuring material information with information that can be omitted can have a similar effect. Although the term obscuring is new in the definition, it was already part of IAS 1 (IAS 1.30A).
  • Could reasonably be expected to influence. The existing definition referred to 'could influence' which the Board felt might be understood as requiring too much information as almost anything ‘could’ influence the decisions of some users even if the possibility is remote.
  • Primary users. The existing definition referred only to 'users' which again the Board feared might be understood too broadly as requiring to consider all possible users of financial statements when deciding what information to disclose.

In addition, the ED proposes some clarifications to the explanation accompanying the definition of material. These proposals include:

  • Relocating some information that explains rather than defines material from the definition into the explanatory paragraphs accompanying the definition;
  • adding a description of the characteristics of the primary users of financial statements;
  • noting that the consideration of the characteristics of users must be judged in the entity’s circumstances;
  • explaining that even well-informed and diligent users may need to seek the aid of an adviser from time to time; and
  • highlighting that the materiality of information is assessed either individually or in combination with other information.

 

Effective date

The exposure draft does not contain a proposed effective date which the IASB intends to decide on after the exposure. However, the Board has already concluded that an entity should apply the amendments prospectively and that earlier application will be permitted.

 

Additional information

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