At first sight the IASB’s proposals to amend the definition of ‘material’ might seem fairly straightforward. After all, feedback received by the IASB indicated that preparers generally had few difficulties in making materiality judgements and the proposed amendments are not intended to alter the underlying concept or affect how materiality judgements are made in practice.
However, closer inspection reveals the changes to be more problematic and, working through its Financial Reporting Committee, ICAEW’s Financial Reporting Faculty has submitted a number of comments in response to the IASB’s consultation ED/2017/6 Definition of material – Proposed amendments to IAS 1and IAS 8.
The IASB’s proposals were issued in September 2017 alongside IFRS Practice Statement 2: Making Materiality Judgements and form part of the IASB’s Disclosure Initiative. The overall objective is to align the definition of material in accounting standards with that in the Conceptual Framework and to ensure it is consistent wherever it appears. This makes sense and the proposals contain some useful updates.
For example, the proposed definition specifies that the users to whom the definition refers are the primary users as defined in the Conceptual Framework, and the threshold ‘could influence’ has been replaced with ‘could reasonably be expected to influence’. This change addresses concerns that the existing threshold might be applied too broadly (almost anything ‘could’ be material) leading to disclosure of immaterial information.
Other proposed changes seem less effective, however, including the IASB’s inclusion of the concept of ‘obscuring’ information in the definition. The intention is to give greater prominence to this concept in order to assist with decisions relating to aggregation and disaggregation, for example, and to encourage more targeted disclosures. While we support this objective, the concept needs clearer explanation and more extensive guidance if this change is to be helpful.
Another significant proposal is to change the subject of the assessment of materiality from the error (the omission, misstatement or degree to which information is obscured) to the information itself. The change in focus supports the wider Disclosure Initiative but is problematic in the context of misstating: any information could be material if the misstatement is large enough. Equally, material information might be misstated without that misstatement being material. In this respect the proposals need rethinking.
There are several other improvements to the wording that could be made. Our full response to the proposals is set out in our representation letter.
Once the amendments to the definition of material are finalised, the IASB expects to make consequential amendments to both the Materiality Practice Statement and the Conceptual Framework (revised version expected in March 2018). It will be interesting to see what emerges from the IASB’s re-deliberations.
The Financial Reporting Faculty will continue to monitor developments and provide guidance to members on the final amendments in due course. To keep up to date with this and other developments, including new and revised standards applicable in 2018 and beyond, why not register now for our June 2018 IFRS Update webinar?