objective of general purpose financial statements is to provide financial
information about a reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing
resources to the entity. The entity identifies the information necessary to
meet that objective by making appropriate materiality judgments’ aim of IFRS
Practice Statement Making Materiality Judgements is to provide reporting
entities with guidance on making materiality judgements when preparing general
purpose financial statements in accordance with IFRS Standards. While some of
the guidance in this Practice Statement may be useful to entities applying the
IFRS for SMEs® Standard, the Practice Statement is not intended for those entities.
aim of this IFRS Practice Statement Making Materiality Judgements (Practice
Statement) is to provide reporting entities with guidance on making materiality
judgements when preparing general purpose financial statements in accordance
with IFRS Standards. While some of the guidance in this Practice Statement may
be useful to entities applying the IFRS for SMEs® Standard, the Practice
Statement is not intended for those entities.
Information is material if omitting it or misstating
it could influence decisions that users make on the basis of financial
information about a specific reporting entity.
need for materiality judgements is pervasive in the preparation of financial
statements. A company makes materiality judgements when making decisions about
presentation, disclosure, recognition and measurement.
• Requirements in IFRS Standards need only be
applied if their effect is material. The Practice Statement also provides some
general guidance on identifying primary users and their information needs.
essential clients the organization ought further bolstering think about when
settling on materiality judgements need aid existing Furthermore possibility
investors, moneylenders What’s more other creditors, Likewise distinguished by
the applied schema.
fiscal explanations do not, and cannot, provide every last one of majority of
the data that elementary clients compelling reason. Hence, for get ready its
budgetary statements, the organization ought point on meet the normal data
needs from claiming its essential clients.
Local laws and regulations:
Practice Statement discusses the interaction between the materiality judgements
a company is required to make and local laws and regulations.
Practice Statement clarifies that: the company’s financial statements must
comply with requirements in IFRS Standards, including requirements related to
materiality, to state compliance with those Standards. Hence, a company that
wishes to state compliance with IFRS Standards cannot provide less
information than the information required by the Standards, even if local laws
and regulations permit otherwise.
providing additional information to meet local legal or regulatory requirements
is permitted by IFRS Standards even if, according to IFRS materiality
requirements, that information is not material. However, such information must
not obscure material information.
The materiality processes
four-step materiality process: The Practice Statement includes a description of
a four-step materiality process. The description provides an overview of the
role materiality plays in the preparation of financial statements and focuses
on the factors a company should consider when making materiality judgements.
process illustrates one possible way to make materiality judgements and
incorporates the materiality requirements a company must apply to state
compliance with IFRS Standards.
topics: The Practice Statement includes specific guidance on how to make
materiality judgements on prior period information, errors and covenants, and
in the context of interim reporting.
Assessing whether prior-period information is
material to current-period financial statements might lead a company to:
provide more prior-period information than was included in prior-period
financial statements, when that information is necessary to understand
current-period financial statements; or
• provide less prior-period information than
was included in prior-period financial statements, when that information is not
necessary to understand current-period financial statements.
errors are omissions and/or misstatements in a company’s financial statements
that individually or collectively could reasonably be expected to influence
decisions that primary users make. IFRS Standards require the company to
correct all material errors.
Practice Statement clarifies that the company assesses whether an error is
material by applying the same considerations as outlined in the materiality
Information about covenants
Practice Statement explains that a company should consider both the consequences
of a breach of covenant and the likelihood of such a breach occurring when
assessing the materiality of information related to covenants.
The Practice Statement clarifies that, when preparing
an interim financial report in accordance with IAS 34 Interim Financial
Reporting, a company considers the same materiality factors it considers in
preparing its annual financial statements. However, the company takes into
consideration that the time period and the purpose of an interim financial
report differ from those of the annual financial statements. In particular, the
interim financial report is intended to provide an update on the latest
complete set of annual financial statements.
of the Practice Statement
Board is committed to assessing and sharing knowledge about the likely costs of
implementing proposed new requirements and guidance—the costs and benefits are
collectively referred to as ‘effects’.
Board expects the Practice Statements
• It enhance awareness of the role of
materiality in helping to promote positive changes in behavior.
encourage the companies to exercise judgement to a greater extent, leading to a
reduction in boilerplate disclosures and redundant information.
provide a framework to assess the need for information in the financial
statements that is additional to the disclosure requirements specified by IFRS
• provide a reference point for discussions
between a company and its auditors and regulators on the assessment of materiality,
helping those parties to reach agreement.
The Board does not expect any significant costs
associated with the application of the Practice Statement because it introduces
no new requirements and is not mandatory. However, companies that have previously
relied on a checklist approach when preparing their financial statements might
face some implementation costs when making the judgements discussed in the
concluded that the benefits of higher-quality disclosures and easier access to
information for primary users of financial statements exceed the implementation
costs companies might incur when applying judgement in preparing financial
statements, rather than following a checklist approach.
to publishing the Exposure Draft, the Board undertook extensive outreach to
assess whether guidance on materiality should be developed and what should be
included in that guidance. The outreach included discussion with the IFRS
Advisory Council; the Accounting Standards Advisory Forum (ASAF); the World
Standard-Setters; the Capital Markets Advisory Committee (CMAC); the Global
Preparers Forum (GPF); representatives of the International Accounting and
Assurance Standards Board and the International Organization of Securities
Commissions; and a number of other accounting professionals, academics and
representatives of other regulatory bodies.
addition, the Board considered information from its own review of academic
literature and research. The Board received and analyzed comment letters in
response to the Exposure Draft. The Board also conducted additional outreach on
the proposals in the Exposure Draft, including consultations with the ASAF, the
CMAC and the GPF.