IASB moves to help management understand materiality

GLOBAL standard setter the IASB has published draft guidance to help company management determine whether information is material.

As part of the IASB’s wider initiative to improve disclosures, the draft guidance has been developed in response to concerns that management are often uncertain about how to apply the concept of materiality and therefore use the disclosure requirements in IFRS as a checklist.

This can result in excessive disclosure of immaterial information that can obscure useful information and also make financial statements cluttered and less understandable. It can also lead to useful information being left out, the IASB said.

The guidance comes as UK reporting watchdog the FRC has raised concerns around how some boards assess materiality and noted that materiality should not be used to justify opaque reporting about relevant items such as amendments to prior year accounts.

Whether information is material or not depends on a range of factors and entity-specific circumstances, and is a matter of judgement. Determining what information is material also requires an understanding of the users of the financial statements and the decisions that they make based on those financial statements.

“Financial statements are meant to be a means of communication, and should not be viewed as a mere compliance exercise. Management needs to take a step back and consider whether they are providing the right level of information in the financial statement and whether it is useful,” said Hans Hoogervorst, IASB chairman.

The draft guidance on materiality complements an amendment made to IAS 1 Presentation of Financial Statements by the IASB in 2014, which clarified that companies do not need to apply the specific disclosure requirements in IFRS if the related information is not material. It also specified that a company should consider whether to provide additional disclosures when compliance with the specific requirements would be insufficient in disclosing material information.

The deadline for submitting comments on the draft guidance is 26 February 2016.

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