FASB Tentatively Decides to Amend Definition of Materiality
At its meeting on November 8, 2017, the FASB discussed the proposed definition of materiality in FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting (CON 8), and ASC 235.1 The Board tentatively decided that it would amend the definition of materiality, including the removal of the reference to materiality as a “legal concept.”
Background
In 2015, the Board issued proposed amendments2 to CON 8 and ASC 235 that would provide consistency between the definition of materiality for financial reporting purposes and the legal concept of materiality. The proposed amendments defined materiality, in part, as a “legal concept”; however, many constituents responding to the proposed amendments expressed concern with the reference of materiality as a legal concept, in large part because of the perceived implication that legal professionals may need to be involved in evaluating materiality.
Tentative Decisions Reached
Although it was not the Board’s intent to require legal professional involvement in making materiality decisions, it tentatively agreed to amend the definition of materiality in CON 8 and ASC 235 with language similar to FASB Concepts Statement No. 2, Qualitative Characteristics of Accounting Information (superseded), which states:
The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.
As a result, the reference to materiality as a legal concept will be removed from the definition. The Board also observed that incorporating the amendments will provide greater consistency in the definition of materiality used by the SEC, PCAOB, and AICPA.
The IASB issued an exposure draft3 on materiality in September 2017. Although the boards’ intention was to have convergence on the definition of materiality, it is likely that their respective definitions, while similar, will not be entirely converged.
Footnotes
1
FASB Accounting Standards Codification (ASC) Topic 235, Notes to Financial Statements.
2
FASB Proposed Accounting Standards Update, Notes to Financial Statements (Topic 235) — Assessing Whether Disclosures Are Material.
3
IASB Exposure Draft ED/2017/6, Definition of Material — Proposed Amendments to IAS 1 and IAS 8.