IASB amends definition of ‘material’
IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors include a definition of ‘materiality’ which must be applied when judging whether information should be included, or amounts adjusted, in the financial statements.
In response to findings that some entities were finding it difficult to apply this definition in practice, the International Accounting Standards Board (IASB) recently issued amendments to clarify:
- The definition of what is ‘material’ to the financial statements, and
- How this definition should be applied (guidance has been added to the definition and explanations accompanying the definition have been improved).
Consequential amendments have also been made to ensure that the definition of ‘material’ is consistent across all IFRS Standards, as well as the Revised Conceptual Framework (2018) and IFRS Practice Statement 2 Making Materiality Judgements.
When does the new definition of ‘material’ become effective?
The changes apply to annual periods beginning on or after 1 January 2020. Early adoption is permitted once the amendments have been approved by the Australian Accounting Standards Board.
Comparison old vs new definitions
The table below illustrates both the old and revised definitions in IAS 1 as follows:
|Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements
||Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.
The definition of ‘material’ has been deleted from IAS 8 and is incorporated by cross-referencing to the full definition in IAS 1.
Key implications of the revised wording include:
- Could reasonably be expected to influence - The insertion of the words ‘could reasonably be expected to influence decisions’ will increase the threshold for disclosure, and thereby narrow the pool of information to be disclosed. Feedback received by the IASB indicated that the words ‘could influence’ may result in ‘information overload’ because almost anything ‘could influence’ the decisions of users. The revised wording should help to address this problem.
- Obscuring information - While materiality is generally viewed in terms of the need to include information in the financial statements, IAS 1 paragraph 30A already refers to the fact that material information should not be obscured with immaterial information. By adding the word ‘obscuring’ to the revised definition, the IASB wished to emphasise that obscuring information can have just as much impact on decisions by primary users than omitting or misstating information.
- Primary users – The amended definition clarifies that only primary users need to be considered, and not all users. Primary users are existing and potential investors, lenders, and other creditors who must rely on general purpose financial reports for information.
Additional guidance to accompany the revised definition
New guidance introduced by the amendments highlight that:
- Materiality depends on the nature (qualitative factors) or magnitude ($ amount) of information, or both.
- Entities must assess whether information is material by itself, or when combined with other information.
- Information is obscured if it has a similar effect for primary users to omitting or misstating information. Material information can be obscured if:
- Information about an item, transaction or event is disclosed, but the language used is vague or unclear
- Information about an item, transaction or event is scattered throughout the financial statements
- Dissimilar items are inappropriately aggregated
- Similar items are inappropriately disaggregated, and
- The understandability of the financial statements is reduced as a result of material information being hidden by immaterial information to the extent that primary users are unable to determine what information is material.
- Financial statements are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse information diligently, but at times even well-informed and diligent users may need to seek help from advisers to understand information about complex arrangements.