Global Standards for the world economy

Monday 26 August 2019

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The Materiality project was discussed at the November 2016 IASB meeting

 14 November 2016


The Board met on 14 November 2016 to discuss the comments on the Exposure Draft IFRS Practice Statement: Application of Materiality to Financial Statements (the draft Practice Statement).

The draft Practice Statement was published in October 2015 with a 120-day comment period. The objective of the draft Practice Statement was to assist management in applying the concept of materiality to general purpose financial statements prepared applying IFRS Standards.

Agenda Paper 11A: Errors

The Board discussed guidance on the application of materiality to errors. The Board tentatively decided to:

  1. suggest that entities apply the ‘Materiality Process’ (as described in Agenda Paper 11D presented to the Board in October 2016) to assess whether an error is material. Ten of 11 Board members agreed and one member disagreed with this decision.
  2. clarify that the assessment of the materiality of a ‘cumulative error’ should be based on conditions existing when the financial statements for the period are authorised for issue. Six of 11 Board members agreed and five members disagreed with this decision.
  3. avoid providing guidance on how to correct a material cumulative error. Six of 11 Board members agreed and five members disagreed with this decision.
  4. remove guidance from the Practice Statement implying that an error is always material if it is made intentionally to achieve a particular presentation or result. Ten of 11 Board members agreed and one member disagreed with this decision.

Agenda Paper 11B: Covenants

The Board discussed the impact of covenants on the application of materiality. The Board tentatively decided to:

  1. include in the Practice Statement specific guidance on how to assess the materiality of information about the existence and the terms of a covenant, or a covenant breach; and
  2. emphasise that, in making the above assessment, an entity may consider the consequences of a breach on the entity’s financial position, financial performance and cash flows; and the likelihood of the breach occurring.

Ten of 11 Board members agreed and one member disagreed with these decisions.

Agenda Paper 11C: Stewardship

The Board discussed how stewardship could be considered when applying materiality.

The Board noted that information needed to assess the stewardship of management is necessary to meet the objective of financial reporting. The Board tentatively decided that, in assessing materiality of information, an entity should consider whether that information is needed to assess stewardship.

Ten of 11 Board members agreed and one member disagreed with this decision.

Agenda Paper 11D: Recognition and measurement

The Board discussed the application of materiality in the context of recognition and measurement together with proposed changes to the guidance on the role of practical expedients in the application of materiality. The Board tentatively decided to:

  1. include guidance on the application of materiality in the context of recognition and measurement throughout the Practice Statement, rather than in a separate section. Nine of 11 Board members agreed and two members disagreed with this decision.
  2. retain in the Practice Statement examples of the application of materiality in the recognition and measurement, or disclosure, of information included in the financial statements. Seven of 11 Board members agreed and four members disagreed with this decision.

Agenda Paper 11E: Entities applying the IFRS for SMEs® Standard

The Board discussed the applicability of the Practice Statement to entities applying the IFRS for SMEs Standard. The Board tentatively decided that the Practice Statement is not intended for entities applying the IFRS for SMEsStandard.

All 11 Board members agreed with this decision.

Agenda Paper 11F: Status and form of the guidance

The Board discussed the status (ie mandatory versus non-mandatory) and the form that the guidance on applying the concept of materiality to IFRS financial statements should take.

The Board tentatively decided to confirm that the guidance on applying the concept of materiality to IFRS financial statements would be issued as an IFRS Practice Statement, ie as non-mandatory guidance.

All 11 Board members agreed with this decision.

Next steps

At a future meeting the Board is expected to once again discuss guidance on the application of materiality to prior period information; the staff will also bring a paper summarising the due process steps completed to date.