The IASB has issued for comment an exposure draft of a proposed practice statement Application of Materiality to Financial Statements, with comments to be received by February 26, 2016.
Here’s how the accompanying news release summed this up:
- “The draft guidance, in the form of a draft Practice Statement, has been developed in response to concerns that management are often uncertain about how to apply the concept of materiality and therefore use the disclosure requirements in the Standards as a checklist. This can result in excessive disclosure of immaterial information that can obscure useful information and also make financial statements cluttered and less understandable. It can also lead to useful information being left out.
- Whether information is material or not depends on a range of factors and entity-specific circumstances, and is a matter of judgement. Determining what information is material also requires an understanding of the users of the financial statements and the decisions that they make based on those financial statements.”
This is what IASB Chair Hans Hoogervorst had to say:
- “Financial statements are meant to be a means of communication, and should not be viewed as a mere compliance exercise. 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.
- The Practice Statement should help guide management’s judgement, encouraging them to remove repetitive and uninformative wording and improve the overall quality of financial statements.”
As such, of course, this is very much aligned with the recent amendments to IAS 1, which attempt to encourage and support a sharper focus in this regard. As financial reporting guidance goes, the draft practice statement strikes me as a fairly accessible read – anyone involved in any aspect of financial reporting should be able to relate to it in one way or another. Some of it merely summarizes the existing landscape, but it will still be useful to have it available in this form.
Much of the interest though, and much of its potential ability to make a difference, will lie in the specific examples it contains. I’ll just pick out a couple that I might personally have found useful to cite for people in the past, when shaking my head over the relentless triviality of some draft financial statement I’d been given to review:
- IFRS 2 Share-based Payments prescribes detailed disclosure requirements for an entity that has share-based payment transactions. If share-based payments are material to the financial statements, the entity considers which information required by paragraphs 44–52 of IFRS 2 is useful to the primary users and also whether any additional information should be disclosed. In some cases, instead of disclosing all the information in paragraphs 44–52 of IFRS 2, it might be appropriate to summarise some information, such as providing a range of vesting periods, if that does not lead to the loss of material information.
- …a detailed reconciliation of property, plant and equipment may have been included in the prior year financial statements because of changes that took place in that period. However, it might not be necessary to include such a detailed reconciliation in the current period if there have been limited changes in the current year. For example, it may be appropriate to aggregate some of the information that was presented separately in the prior year reconciliation when preparing comparative information for the current period financial statements.
The document isn’t all about reduction though. Some of its examples might sometimes be used by advisors to advocate for greater disclosure in some areas, such as:
- …an entity may have a small net foreign exchange difference as a result of transactions in foreign currencies. That net difference might have arisen from a large number of small exchange gains on a broad base of recurring transactions and a substantial loss that resulted from one speculative forward foreign exchange transaction. IAS 21 The Effects of Changes in Foreign Exchange Rates specifies only that the amount of exchange differences is disclosed. When making judgements about materiality, the entity should assess whether the loss should be reported separately from the other exchange differences. The fact that a large loss was incurred relative to the other transactions, and that the loss was from speculative activity, suggests that aggregating these exchange differences would result in a loss of material information. In this scenario, information that could influence users’ opinions of management’s stewardship would be lost through aggregation.
- …a fall in sales of a major product from a material amount in the prior year to an immaterial amount in the current year may be a material change that should be separately disclosed or identified in the current year.
That last example, in particular, might strike many readers as something that would more typically be disclosed in MD&A than in financial statements, raising questions about whether this blurs the line between the two. Still, given that the line is inherently rather arbitrary and form-driven, maybe that’s not such a bad thing.
More on this next time…
The opinions expressed are solely those of the author