IASB proposal would guide management on materiality

The International Accounting Standards Board (IASB) on Wednesday published its draft guidance on materiality to help company management determine whether information should be disclosed.

The guidance follows similar action by the US Financial Accounting Standards Board (FASB), which last month issued two proposals intended to clarify the concept of materiality for financial statement preparers who are trying to discern what information to disclose in financial statements. Both proposals are part of wider efforts by the boards to help management deliver financial statements that present information in a clear and effective way while eliminating “disclosure overload.”

“Financial statements are meant to be a means of communication and should not be viewed as a mere compliance exercise,” IASB Chairman Hans Hoogervorst said in a news release. “Management needs to take a step back and consider whether they are providing the right level of information in the financial statement and whether it is useful.”

Hoogervorst said the practice statement draft issued by the IASB should help guide management’s judgement and encourage preparers to remove repetitive and uninformative wording.

The IASB’s draft guidance was developed in response to concerns that uncertainty about how to apply the concept of materiality leads management to use the disclosure requirements in IFRS as a checklist. This can result in excessive disclosure of immaterial information that makes financial statements cluttered and less understandable while obscuring useful information, according to the IASB.

The draft guidance is intended as a complement to an amendment made in 2014 to IAS 1, Presentation of Financial Statements, which clarified that companies do not need to apply the specific disclosure requirements in the standards if the related information is immaterial. The draft guidance describes:

• The characteristics of materiality.
• How to apply the concept of materiality when making decisions about presenting and disclosing information in the financial statements.
• How to assess whether omissions and misstatements of information are material to the financial statements.

Comments can be submitted to the IASB via its website until February 26th.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine editorial director.