MaterialityPosted: November 30, 2015
There sure has been a lot of focus on materiality lately. Recently the FASB came out with a couple of proposals on materiality. The first is a proposal to change the concept statements to make materiality a legal concept defined by the Supreme Court. While I have heard some howls about making the accounting definition of materiality based on the legal definition, I think the proposal is simply allowing the rules to catch up with reality. The reality is that all companies – public or not – are being held to that standard because the concept of materiality really only matters when someone decides to sue over financial statements, which means it is being decided in court.
The second is a proposal to update a lot of disclosure requirements to clarify that disclosures are not required when the underlying transactions are not material to the reporting entity. Finally, we preparers will have a leg to stand on when a standard says you have to disclose something, but it is clear the transaction is not material. I still think there will be a tendency to provide defensive disclosures. That is, provide the disclosure even if it isn’t material, then someone can’t say “it would have been material to me.” But at least the proposed changes may make the preparer-auditor conversation about what really matters to the business rather than whether the rules give you an option to disclose something.
Not to be left out, the IASB also issued a draft guidance on applying the concept of materiality. But, someone will have to read that and tell me about it because I only have so much time and reading IFRS documents is one of those things that isn’t making it to my list of things to do these days.
Finally, IFAC released a report on materiality in integrated reports. There seems to be a lot of confusion about how to measure and think about materiality in integrated reporting. The report really comes to the conclusion that the issue is not about materiality, but about who is the user of the integrated report. Once you decide who the user is, materiality is pretty easy to understand – what matters to that user. The problem is that often preparers perceive there are a number of key audiences (users) for an integrate report and that means they think there are a number of different materiality measures to be used. While I certainly agree that there are expectations that a number of different audiences will benefit from receiving the information in an integrated report, the fact is that an integrated report is purported to be primarily for the use of investors in a business. Once you regain that focus on the intended user of an integrated report, determining what is material becomes an exercise that all of us are used to handling.