IASB Modernises the Concept of Materiality: What is New?
By Dr Thomas Geiger, Munkert & Partner
In October 2018, the International Accounting Standards Board (IASB) issued amendments to IAS 1 and IAS 8 in the context of applying IFRS. The amendments clarify the definition of “material” and how it should be applied. More definition guidance is provided, and the accompanying explanations have been improved. Finally, the amendments ensure that the definition of “material” is consistent throughout all IFRS pronouncements. The changes are effective for periods beginning on or after January 2020, although earlier application is permitted.
With the new regulations, IASB responds to findings that some reporting entities faced diffculties in the past using the old definition, when judging whether information is material for the financial statements or not. There is no doubt that the materiality concept, and the decision of what is and is not material, is crucial in preparing financial statements in accordance with IFRS. So, changes in the definition may strongly affect how preparers make judgements when preparing financial statements. To improve the basis for the preparers’ judgement, IASB intends to increase clarity in applying the concept of materiality, but it is not intended to alter the concept of materiality in the IFRS Standards.
The New Definition in IAS 1
“Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”
What Is New? An Overview
- Change of reference base: The previous definition of materiality was based on the conditions under which omissions and misstatements are to be regarded as material, while according to the new definition, the information to be provided is itself referred to.
- Focus on primary users: The new definition focuses on the primary users that are current and potential investors, lenders, and other creditors, as these generally do not have access to direct information about the company and so must rely on publicly available financials. The new focus narrows the view of what may be material in a given circumstance. Decisive in this context are the general or usual information needs, which result from the economic interests of the users.
- Raising the materiality threshold: The new definition contains the reasonable expectation as a new element. Only if it can reasonably be expected that omission, misstatement, or obscuring could influence decisions, is material information given. Without the criteria of reasonable expectation, the previous materiality threshold was often considered to be too low, since in principle everything could influence the decision of the users, even if this would not be likely to occur.
- Obscuring as a new element: The revised definition adds the element that obscuring information may also be relevant in determining whether an item is material to primary users or not. Obscuring is likely to occur when information is communicated in a way that has the same effect on the user of the financial statement as omission or misstatement. For example, the disclosure of immaterial information in financial statements may result in obscuring when it covers up the material information in such a way that the primary user can no longer clearly distinguish material from immaterial information.
In summary, the refinements help to improve the understanding of materiality, but substantial changes in content are not apparent. The new materiality concept and the related guidance will help to increase usability for the preparers of financial statements, in determining the level of precision needed in applying accounting policies, determining what disclosures must be made, and the aggregation level of information provided in the financial statements.
But thus far it is not expected that the new definition of materiality will lead to tremendous changes in practice.
Dr Thomas GeigerGGI member firm
Munkert & Partner Steuerberater Wirtschaftsprüfer Rechtsanwälte GbR
Tax, Advisory, Auditing & Accounting
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Munkert & Partner, stablished in 1969 and celebrating its fiftieth birthday this year, is a multi-disciplinary advisory firm providing tax and legal advisory, accounting and auditing, as well as corporate finance services, mainly for mid-size clients as well as public-sector companies.
Dr Thomas Geiger is the responsible partner for the business unit audit and audit related services within Munkert & Partner. After several years in one of the Big Four accounting firms, he joined the company in 2007. He has almost 20 years of experience in the audit of annual and consolidated financial statements, as well as in financial due diligences.
Published: Auditing, Reporting & Compliance Newsletter, No. 02, Autumn 2019 l Photo: Oliver - stock.adobe.com