28 October 2015
The
International Accounting Standards Board (IASB) today published draft
guidance to help company management determine whether information is
material. The guidance is part of the IASB's wider initiative to improve
disclosures.
The concept of 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.
It also enables management to present material information in a clear
and effective way, excluding information that is not material.
The draft guidance, in the form of a draft Practice Statement, has been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 the Standards 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.
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.
Hans Hoogervorst, IASB Chairman, commented
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.
The Practice Statement should help guide management's judgement, encouraging them to remove repetitive and uninformative wording and improve the overall quality of financial statements.
Improving the quality and quantity of disclosures requires joint
efforts by auditors, regulators, companies and standard-setters. The
IASB has therefore consulted with the International Auditing and
Assurance Standards Board (IAASB) and the International Organization of
Securities Commissions (IOSCO) during the development of the draft
Practice Statement.
The draft guidance on materiality complements an amendment made to IAS 1 Presentation of Financial Statements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 Standards 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 Practice Statement is 26 February 2016.