IFRS Practice Statement No. 2 “Making Materiality Judgements”
The International Accounting Standards Board (IASB) has issued IFRS Practice Statement No. 2 “Making Materiality Judgements” which provides entities with guidance on making materiality judgements when preparing general-purpose financial statements in accordance with International Financial Reporting Standards (IFRS).
The need for materiality judgements is pervasive in the preparation of financial statements. IFRS require entities to make materiality judgements in decisions about recognition, measurement, presentation and disclosure.
The IASB’s Practice Statement:
provides an overview of the general characteristics of materiality;
presents a four-step process entities may follow in making materiality judgements when preparing their financial statements; and
provides guidance on how to make materiality judgements in specific circumstances – how to make materiality judgements about prior-period information, errors and covenants, and in the context of interim reporting.
The Practice Statement is a non-mandatory document. It does not change or introduce any new requirements to IFRS; entities are not required to comply with the Practice Statement.
The Practice Statement encourages entities to apply judgement instead of using IFRS requirements as a checklist, so that financial statements focus on the information that is useful to investors.
The Practice Statement is available from the IASB [subscription required].
Exposure Draft “Definition of Material”
The IASB has also today published for public comment proposed amendments to the definition of “material”. The Exposure Draft Definition of Material proposes minor amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to clarify the definition and improve understanding of the existing IFRS requirements. The IASB is seeking comments on the Exposure Draft by 15 January 2018.
IAASA issued a Paper in 2010 entitled Observations on Materiality in Financial Reporting. That Paper outlined our interaction with issuers at that time as well as specific recommendations as to how issuers should be dealing with, and applying, the concept of materiality in their financial reports. Resulting from this, IAASA’s representative chaired the Sub-Group on Materiality established by the European Securities and Markets Authority (ESMA). The main output from that Sub-Group was the issuance of an ESMA Consultation Paper Considerations of Materiality in Financial Reporting followed by a Feedback Statement which provided an overview of the key messages from the responses received to the questions in the consultation. ESMA has subsequently engaged with the IASB on its subsequent broad-based Disclosure Initiative of which this IFRS Practice Statement is one of the outputs.