International Board Advisers Split Over Materiality Proposals

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By David R. Jones

July 7 — Members of an advisory group to the International Accounting Standards Board wrangled during a July 7 meeting about the value of proposed IASB guidance on applying the concept of materiality to financial reporting.

At the meeting in London of the Accounting Standards Advisory Forum—a sounding board for standard setters and regional organizations—some participants expressed concern that the proposed practice statement on materiality that IASB released in October 2015 was overly broad.

Others, however, said the proposed guidance would aid company managers in preparing financial reports.

Filter for Information

The draft practice statement—published as an exposure draft (ED/2015/8) as part of the board's larger disclosure initiative, which is designed help preparers, auditors, and regulators apply the concept of materiality to general purpose financial statements (11 APPR 23, 11/6/15).

IASB said materiality “acts as a filter through which management sifts information to ensure that financial statements include all the financial information that could influence users' investment decisions.”

If approved, the practice statement would offer non-mandatory guidance encompassing examples and explanations to help company managers determine whether information is material.

Current Requirements

International Accounting Standard : Presentation of Financial Statements requires management to apply materiality judgments when preparing a financial report under international financial reporting standards.

In addition, the board's conceptual framework includes a definition of materiality.

Still, “how the concept of materiality is applied in practice is seen by many as a major cause of the ‘disclosure problem,’” a notice on IASB's website said.

Two-Part Exercise

IASB staff issued papers to ASAF on proposals to identify material information for primary users, along with a suggested process for making materiality judgments.

Staff recommended a two-part exercise for distinguishing material information.

“The first element would comprise the information that IFRS Standards identify for inclusion in the financial report, but reduced to exclude information that is identified as not material, principally from a quantitative perspective,” a staff paper said.

In the second step, entities would pinpoint other information that should be included in a financial report to satisfy the additional information needs of all, or major subsets of, primary users.

Making Materiality Judgments

Staff also outlined a proposed four-step process for conducting materiality judgments in preparing financial reports, which would comprise:

  •  identifying primary users of financial reports and the information they need;
  •  evaluating particular information items about an entity's financial performance and financial position “to decide whether the information is material in the context of the financial report as a whole;”
  •  organizing material information within a financial report, including whether to present information separately in a primary financial statement or in the notes to a financial report; and
  •  reviewing the entire draft financial report.

A major question is whether the practice statement should focus on broad financial reports or on narrower financial statements, a staff member said in introducing the proposals.

Mixed Reactions

The suggestions met with mixed reviews from ASAF members, with several voicing doubts about the materiality project's overall direction.

In assessing the two-part proposal for identifying material information, several meeting participants urged caution on including it in the guidance.

Dissenters complained that the proposal lacked specifics and needed boundaries.

‘Very Sweeping.'

“This seems very broad and very sweeping,” a forum member said.

Another, though, said that a widely applicable process for distinguishing material information was needed.

“We have to paint it in pretty broad strokes,” he said.

Other ASAF members warned that it could prove tough to categorize subsets of primary users as part of the two-stage exercise, with one member saying that primary users already are difficult to identify.

Assisting Managers

The four-step process for undertaking materiality judgments drew support from several members, with one attendee saying the process would help management in determining what financial information is material.

Others wondered what practical steps managers would need to take to assess particular information items about an entity's financial performance and financial position.

“The key question is, how do I do this?” a forum member asked.

Adding examples would be helpful, he said—including what he called a borderline case where judgment might not be clear cut.

Deciding on Direction

ASAF's discussion echoed conflicts over proposed changes to the working concept of materiality put forth by the U.S. Financial Accounting Standards Board (11 APPR 26, 12/18/15) .

IASB staff suggested during the ASAF meeting that its two-part proposal to identify material information for primary users and its four-step process on exercising materiality judgments might be combined.

The board plans to decide within the next six months what direction the materiality guidance project should take, according to its latest work plan.

To contact the reporter on this story: David R. Jones in London at

To contact the editor responsible for this story: Xing Gao at

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