Applying materiality in preparing financial statements | KPMG | CN

Applying materiality when preparing financial statements

Applying materiality in preparing financial statements

IASB issues guidance for companies on making materiality judgements

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The IASB is striving to end the ‘checklist’ mentality by encouraging companies to use greater judgement

Making financial statements information more relevant and less cluttered is one of the IASB’s key focus areas.

The Board has issued Practice Statement 2 Making Materiality Judgements, which aims to provide practical guidance on how to apply the concept of materiality.

The guidance is not mandatory and does not introduce any new requirements or change existing ones. Companies can apply it with immediate effect.

 

 “The practice statement seeks to drive behavioural change and encourage companies to apply greater judgement when preparing their financial statements. 

Achieving this behavioural change is likely to depend on the IASB’s other Disclosure Initiative projects, and on preparers, regulators and auditors working together to make it happen.”

Gabriela Kegalj,

KPMG's global IFRS presentation deputy leader

Materiality as a filter

Companies make materiality judgements not only when deciding what information to disclose and how to present it, but also when making decisions about recognition and measurement.

In terms of disclosure, applying the concept of materiality allows management to filter information that is relevant to users of financial statements from information that is not.

However, management are often uncertain about how to apply the concept of materiality to disclosure, and find it easier to defer to using the disclosure requirements within IFRS as a checklist.

Judgement is key

Deciding what information is material is a matter of judgement – not a compliance exercise – and depends on a range of factors.

The practice statement should help management be more confident when applying and exercising judgement. Management can better achieve the right balance by providing relevant information that is specific to their circumstances.

A systematic process for making judgements

To help preparers make materiality judgements, the Board has developed a four-step materiality process:

To provide more clarity in some common judgemental areas, specific guidance is provided on materiality judgements relating to prior period information, errors, disclosing information about covenants and interim reporting.

Changes to the definition of materiality

As well as issuing the practice statement, the Board has issued an exposure draft proposing minor changes to the definition of materiality. These changes should enhance consistency across the standards and the conceptual framework, and improve clarity.

The Board does not expect the proposals to significantly impact the financial statements.

 

“The Board’s objective to create consistency in the definition of materiality is welcome. However, the reference in the definition to obscuring material information may be challenging to implement.”

Gabriela Kegalj,

KPMG's global IFRS presentation deputy leader

 

The Board’s comment deadline on the ED is 15 January 2018. We encourage you to take this opportunity to have your say.

This article is also available in print-friendly format (PDF 452 KB). 

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