IFRS Practice Statement Making Materiality Judgements

Objective

The objective of IFRS Practice Statement Making Materiality Judgements is to assist management in
presenting financial information about the entity that is useful to existing and potential investors, lenders
and other creditors in making decisions about providing resources to the entity.

The Practice Statement is not an IFRS. Consequently, entities applying IFRSs are not required to comply
with the Practice Statement. However, it should be noted that materiality is a pervasive principle in
IFRSs.

Scope
The Practice Statement applies to the preparation of financial statements in accordance with full IFRS. It
is not intended for entities applying the IFRS for SMEs.

General characteristics of materiality

Definition of material
The Practice Statement works with the definition of materiality in the current Conceptual Framework.

Information is material if omitting it or misstating it or obscuring it could influence decisions that users
make on the basis of financial information about a specific reporting entity.

In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude, or
both, of the items to which the information relates in the context of an individual entity’s financial
report.

Similar definitions are contained in IAS 1 Presentation of Financial Statements and IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors.*

Pervasiveness of materiality judgements

The Practice Statement notes that the need for materiality judgements is pervasive in the preparation of
financial statements and affects recognition, measurement, presentation, and disclosure. Thus an entity
is only required to apply recognition and measurement requirements when the effect of applying them
is material and need not provide a disclosure specified by an IFRS if the information resulting from that
disclosure is not material.
Judgement
When assessing whether information is material, an entity considers its own specific circumstances and
the information needs of the primary users of its financial statements. Materiality judgements are
reassessed at each reporting date.

Primary users and their information needs

Primary users of an entity's financial statements are existing and potential investors, lenders and other
creditors. They can be expected to have a reasonable knowledge of business and economic activities and
to review and analyse the information included in the financial statements diligently. The objective of
financial statements is to provide these primary users with financial information that is useful to them in
making decisions about providing resources to the entity. Therefore, an entity also needs to consider
what type of decisions these users have to make. However, general purpose financial statements are not
intended to address specialised information needs, they focus on common information needs.

Impact of publicly available information

Financial statements are required to be comprehensive documents and an entity assesses whether
information is material to its financial statements, regardless of whether some of the information may be
also available from other sources.

Four-step process
The Practice Statement notes that an entity may find it helpful to follow a systematic process in making
materiality judgements and offers an example of such a process.

Step 1
The entity identifies information that has the potential to be material. In doing so it considers the IFRS
requirements applicable to its transactions, other events and conditions and its primary users’ common
information needs.

Step 2
The entity then assesses whether the information identified in Step 1 is material. In making this
assessment, the entity needs to consider quantitative (size) and qualitative (nature) factors. The
Practice Statement notes that the presence of a qualitative factor lowers the thresholds for the
quantitative assessment, i.e. the more significant the qualitative factors, the lower those quantitative
thresholds will be. This could, in fact, result in a quantitative threshold of zero if an item of information
could reasonably be expected to influence primary users’ decisions regardless of its size.

Step 3
In a next step, the entity organises the information within the draft financial statements in a manner that
supports clear and concise communication. The Practice Statement notes the following helpful points:

emphasise material matters; tailor information to the entity’s own circumstances; describe the entity’s
transactions, other events and conditions as simply and directly as possible; highlight relationships
between different pieces of information; provide information in a format that is appropriate for its type;
provide information in a way that maximises, to the extent possible, comparability; avoid or minimise
duplication of information; and ensure material information is not obscured by immaterial information.

Step 4
In the most important step, the entity then steps back and assesses the information provided in the draft
financial statements as a whole. It needs to consider whether the information is material both
individually and in combination with other information. This final assessment may lead to adding
additional information or removing information that is now considered immaterial, aggregating,
disaggregating or reorganising information or even to begin the process again from Step 2.

Guidance on materiality judgements in specific circumstances

The Practice Statement also offers some guidance on materiality judgements in specific circumstances.
These are

a) Prior-period information (including prior-period information not previously provided and

summarizing prior-period information),
b) Errors (including cumulative errors),
c) Information about covenants, and
d) Materiality judgements for interim reporting (including interim reporting estimates).

Source-IAS Plus