As the comment period recently closed, we’ll take a quick look on what kind of reaction the proposal received. First, a reminder of the proposed revised definition and supporting language:
- Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of a specific reporting entity’s general purpose financial statements make on the basis of those financial statements.
- Materiality depends on the nature or magnitude of information, or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements. Material information might be obscured if it is not communicated clearly—for example, if it is obscured by immaterial information. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users.
- Assessing whether information could reasonably be expected to influence decisions of the primary users of general purpose financial statements requires consideration of the characteristics of those users judged in the entity’s circumstances….
We discussed some of the underlying issues last time, including the following:
- The new reference to “obscuring” information chimes with the existing wording in IAS 1.30 that an entity “shall not reduce the understandability of its financial statements by obscuring material information with immaterial information.” Under the current definition (of materiality), an issuer might argue (albeit not very scrupulously) that a key piece of narrative information is appropriately disclosed even if it’s buried in the middle of a large block of insignificant drivel. The revised version makes it clearer that financial statements might be considered materially misstated on such a basis.
It looks like this aspect of the proposal might be a bit of a sticking point for many respondents. For example, the Canadian Accounting Standards Board thinks “it will be challenging for preparers and auditors to apply judgment to determine whether some information disclosed in the financial statements obscures more material information,” and also believes the concept might increase litigation risk for preparers and auditors. PricewaterhouseCoopers makes a related point:
- The inclusion in financial statements of immaterial information does not by itself obscure material information or result in a misstatement. There is a misstatement only when the presentation of immaterial information has an impact similar to omitting material information…
The letter doesn’t try to illustrate the difference, but perhaps it’s along the lines of the illustration I provided last time. For instance, a key sentence about a material off-balance sheet exposure might be considered to be obscured to the point of misstatement if (say) it’s buried in the middle of a poorly-formatted list, surrounded on either side by a dozen other items that don’t matter at all, and on either side of that by dense paragraphs of boiler-plate. But if the information is more reasonably presented, situated where you’d expect to find it and given some room to breathe, you might argue no amount of immaterial information on adjacent pages can ever lead to it being materially misstated. Even if you agree with those two poles (and I suppose many might not), there’s probably a big undefined area in between.
Grant Thornton supports the proposed reference to “obscuring,” but speculates (surely rather neurotically) that some entities “may question whether clarifying information in a subsequent year now represents the correction of an error.” They “encourage the Board to develop additional application guidance illustrating the appropriate response to a variety of scenarios where information is judged to have been obscured.” The Institute of Chartered Accountants in England and Wales provides examples of what might be covered by such application guidance:
- inappropriate aggregation of dissimilar items;
- inappropriate disaggregation of similar items;
- presenting material information together with a large volume of immaterial information so that the material information is not presented clearly; or
- simply using ambiguous or unspecific language.
Many other respondents made a similar point. The Association of Accounting Technicians suggested a rewrite – “‘Material information might be obscured if, for example, it is not communicated clearly or if it is deliberately obscured by immaterial information” – although I imagine plenty of readers could find problems with that wording too.
Anyway, I hope the IASB takes up some of the suggestions for better illustrating the issue, and then sticks to its guns. It’s awfully common to hear broad complaints about not being able to locate the important information within financial statements – the IASB has cited such concerns many times in connection with its ongoing disclosure initiative. It seems valid to establish that sometimes it’s as important to take things out of the statements as to put them in there, and the “obscuring” reference, in combination with the IASB’s other efforts, directly helps to make that point.
The opinions expressed are solely those of the author.