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Sunday 21 July 2019

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The materiality project was discussed at the October 2016 IASB meeting

 27 October 2016


The Board met on 18 October 2016 to discuss the comments received 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 proposed 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 11B: Audience, focus and definition

The Board discussed the audience and focus of the Practice Statement and the definition of materiality to be used in the Practice Statement. The Board tentatively decided to:

  1. clarify that the Practice Statement addresses the application of materiality in preparing financial statements. All 12 Board members agreed with this decision.
  2. acknowledge that the Practice Statement may benefit other parties in addition to those involved in preparing financial statements. All 12 Board members agreed with this decision.
  3. replace the term 'management' with the term 'entity' throughout the Practice Statement. All 12 Board members agreed with this decision.
  4. refer to applying the concept of materiality only in the preparation of financial statements. Ten of 12 Board members agreed with this decision.
  5. include in the Practice Statement the explanation of the definition of materiality contained in IAS 1Presentation of Financial Statements—that an entity should take into account 'how users could reasonably be expected to be influenced in making economic decisions', and use this interpretation consistently throughout the Practice Statement. All 12 Board members agreed with this decision.
  6. make no changes to the definition of materiality in IFRS Standards within this project. All 12 Board members agreed with this decision.


Agenda Paper 11C: Primary users' needs and expectations

The Board discussed the guidance on identifying primary users, their information needs and their expectations for the purposes of applying materiality judgements when preparing IFRS financial statements. The Board tentatively decided to:

  1. refer to 'primary users' (as defined by the Conceptual Framework) throughout the Practice Statement. All 12 Board members agreed with this decision.
  2. emphasise in the Practice Statement that 'primary users' of an entity's IFRS financial statements include potential investors, potential lenders and potential other creditors. All 12 Board members agreed with this decision.
  3. reconsider references to the 'special needs' of primary users and to 'subsets' or 'classes' of primary users in the Practice Statement. Eleven of 12 Board members agreed with this decision.
  4. use the term 'expectations' of primary users (as currently used in paragraph 17 and 22 of the draft Practice Statement) in the Practice Statement only in the same way as it is used in the Conceptual Framework. All 12 Board members agreed with this decision.
  5. revise the guidance provided on 'users of the financial statements and their decisions' in the Practice Statement to convey the concept of 'meeting the maximum amount of common information needs of an entity's primary users'. Eleven of 12 Board members agreed with this decision.


Agenda Paper 11D: The Materiality Process

The Board discussed a four-step 'Materiality Process' for applying materiality judgements to an entity's financial statements. The Board tentatively decided to include in the Practice Statement an overview of how materiality judgements can be applied. In particular, the Board tentatively decided to:

  1. explain that although there is no hierarchy among materiality factors, it could be efficient for entities to first assess an item of information from a quantitative perspective;
  2. explain that when an entity assesses whether an item of information is material on the basis of a qualitative factor, it should also consider quantitative factors; and
  3. include related party transactions as an example of a qualitative factor considered in making a materiality assessment.

All 12 Board members agreed with these decisions.


Agenda Paper 11E: Primary financial statements versus notes and aggregation/disaggregation of information

The Board discussed guidance on the application of materiality to the primary financial statements versus the notes and the role of materiality judgements in determining how information will be aggregated or disaggregated. The Board tentatively decided that the Practice Statement should:

  1. state that a single materiality assessment should be applied to all information included in the financial statements;
  2. explain that an entity should select where to disclose material information within the financial statements (ie primary financial statements or the notes) in a way that communicates the information effectively and efficiently; and
  3. describe how an entity should use a materiality assessment to decide how much to disaggregate information and how much detail to include, in the context of the primary financial statements and the notes.

All 12 Board members agreed with these decisions.


Agenda Paper 11F: Accounting policy disclosures

The Board decided that Practice Statement should not include guidance on the application of materiality to the disclosure of accounting policies, as the issues will be considered more broadly in the Principles of Disclosure project.

All 12 Board members agreed with this decision.


Agenda Paper 11G: Comparative versus corresponding approach and conflicts with local regulations

The Board discussed the application of materiality to information about previous period(s) presented in the financial statements (including consideration of comparative approach versus corresponding approach). The Board asked the staff to bring further analysis to the next Board meeting.

The Board also discussed potential conflicts between the Practice Statement and any local legal or regulatory disclosure or materiality requirements. The Board tentatively decided that the Practice Statement should:

  1. emphasise that its objective is to provide guidance on how to interpret and apply the IFRS concept of materiality to IFRS financial statements. All 12 Board members agreed with this decision
  2. note that IFRS Standards do not prohibit providing additional information to meet local regulatory requirements (even if that information is not material for IFRS Standards), unless that information obscures material IFRS information. Eleven of 12 Board members agreed with this decision.


Agenda Paper 11H: Interim reporting

The Board discussed the application of materiality to interim financial reports. The Board tentatively decided to:

  1. emphasise that when applying a materiality assessment to the interim financial report an entity needs to consider the same factors it considers in the assessment for the annual financial statements;
  2. specify that an entity needs to apply a materiality process (such as described in Agenda Paper 11D) taking into account that the context and purposes of the interim financial report are different from those of the annual financial statements; and
  3. specify that although interim measurements may rely more on estimates than annual financial measurements, that fact alone does not make the interim information more material.

All 12 Board members agreed with these decisions.


Agenda Paper 11I: Publicly available information

The Board discussed the effect of publicly available information on the materiality assessment. The Board tentatively decided to:

  1. remove the wording currently used in paragraphs 57–58 of the draft Practice Statement;
  2. specify that the public availability of information does not affect the materiality assessment; and
  3. specify that the public availability of information does not relieve an entity of the obligation to disclose material information.

Eleven of 12 Board members agreed with these decisions.


Next steps

At a future meeting the Board is expected to confirm the form that guidance on the application of materiality should take, discuss the interaction of materiality with stewardship and clarify terminology issues in preparation for drafting the final guidance.

The Board will also discuss issues relating to the application of the guidance on materiality to errors, covenants and entities applying the IFRS for SMEs, as well as further analysing the application of materiality to prior-period information.