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IASB issues Practice Statement on materiality

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14 Sep 2017

The International Accounting Standards Board (IASB) has issued Practice Statement (PS) 2 'Making Materiality Judgements'. The PS aims at assisting management in presenting financial information about the entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

 

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 ED/2017/6 Definition of Material (Proposed amendments to IAS 1 and IAS 8).

 

Objective and scope

The objective of IFRS Practice Statement Making Materiality Judgements is to assist management in presenting financial information about the entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. It applies to the preparation of financial statements in accordance with full IFRS. It is not intended for entities applying the IFRS for SMEs.

 

General characteristics of materiality

The Practice Statement works with the definition of materiality in the current Conceptual Framework. Similar definitions are contained in IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. However, the IASB is currently working on a new definition of materiality (see ED/2017/6 Definition of Material (Proposed amendments to IAS 1 and IAS 8 published today)) and the IASB notes that if any changes are made to the definition of material in IAS 1 and IAS 8 as a result of the proposals in the ED, the Board will make consequential amendments to the Materiality Practice Statement and the forthcoming revised Conceptual Framework.

The Practice Statement notes that the need for materiality judgements is pervasive in the preparation of financial statements and affects recognition, measurement, presentation, and disclosure. When assessing whether information is material, an entity considers its own specific circumstances and the information needs of the primary users of its financial statements.

 

Four-step process

The Practice Statement notes that an entity may find it helpful to follow a systematic process in making materiality judgements and offers an example of such a process.

  • Step 1. The entity identifies information that has the potential to be material. In doing so it considers the IFRS requirements applicable to its transactions, other events and conditions and its primary users’ common information needs.
  • Step 2. The entity then assesses whether the information identified in Step 1 is material. In making this assessment, the entity needs to consider quantitative (size) and qualitative (nature) factors.
  • Step 3. In a next step, the entity organises the information within the draft financial statements in a manner that supports clear and concise communication.
  • Step 4. In the most important step, the entity then steps back and assesses the information provided in the draft financial statements as a whole. It needs to consider whether the information is material both individually and in combination with other information. This final assessment may lead to adding additional information or removing information that is now considered immaterial, aggregating, disaggregating or reorganising information or even to begin the process again from Step 2.

 

Status and effective date

The Practice Statement is not an IFRS. Consequently, entities applying IFRSs are not required to comply with the Practice Statement. However, it should be noted that materiality is a pervasive principle in IFRSs. The Practice Statement does not have an effective date, it can be applied with immediate effect.

 

Additional information

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