IASB issues guidance for companies on making materiality judgements
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.”
KPMG's global IFRS presentation deputy leader
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.
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.
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.