Making financial statement disclosures more relevant and less boilerplate is one of the IASB’s key focus areas. New proposals on applying materiality are the latest step in the Board’s disclosure initiative.
Too often, immaterial information either obscures or takes the place of information that would be useful to users of financial statements. The draft practice statement aims to clarify the materiality concept and provide practical guidance to help management apply it to financial statements.
“The proposals seek to drive behavioural change by empowering management to apply the concept of materiality when judging which disclosures are relevant to users and which are not. But it remains to be seen how effective they will be.”
Gabriela Kegalj, KPMG’s global IFRS presentation deputy leader
The new guidance complements Amendments to IAS 1 Presentation of Financial Statements – the first step in the disclosure initiative – which clarified that companies need not apply a specific disclosure requirement in IFRS if the related information is not material.
It also arrives at a time when capital market regulators are focusing more closely on the quality of financial statement disclosures.
Applying the concept of materiality enables management to sift 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, and so defer to using the disclosure requirements within IFRS as a checklist.
Deciding what information is material is a matter of judgement – not a compliance exercise – and depends on a range of factors.
The proposed guidance should help management to become more confident in exercising their judgement. To be effective, they need to strike the right balance by providing relevant information that is specific to their circumstances.
The practice statement provides guidance on the key challenges encountered when applying the materiality concept.
|Tendency to focus on quantitative aspects||
|Deciding how to present or disclose information||
|Assessing whether omissions and misstatements of information are material||
As the guidance would be issued as a practice statement, application
would be voluntary unless specifically required in a jurisdiction.
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