International Accounting Standards Board (IASB) has issued exposure draft providing guidance on application of materiality while preparing financial statements as per International Financial Reporting Standards (IFRS).It will help management of company to apply the concept of materiality in preparation and presentation of both annual and interim financial statements of the company. The draft specifies the factors that should be considered at the time of determination of materiality of an information, guidance on presentation and disclosure of material information. It also includes some practical examples to clarify the guidance.
Assessment of materiality by Management
As per the Conceptual Framework for Financial Reporting, an information is said to be material when non-disclosure or omission of the information could influence the decision about the entity taken by users of financial statements on the basis of financial statement. As per the exposure draft on application of concept of materiality, materiality of an information is a matter of judgement. The management of an enterprise make assessment of an information to check whether the information is material or not. While making assessment of materiality management should take into consideration requirements of primary users of financial statements and types of decisions they are taking, nature and size of the information etc. The assessment of materiality should be done on both on individual basis and on collective basis.
Use Judgement by Management for Disclosure of Material Information
The exposure draft states that apart from assessment of materiality, the management of an entity should also use its judgement in deciding way of disclosure and presentation of a material information on the financial statement. Material information should be disclosed in the financial statement in such a way that disclosure of the same would not defeat the objective of financial statement. Any immaterial information should not be disclosed, unless non-disclosure of the same reduce level of understandability of any material information. Further, material information can be aggregated or disaggregated at the time of presentation in financial statement. The management should decide about aggregation or disaggregation of material information and the draft provides guidance to the management thereon.
Presentation of Material Information
The information can be presented either on face of primary financial statements or in the notes to primary financial statements. An information representing a bulk of other information can be presented on face of primary financial statements, otherwise in the notes.
The disclosure requirements specified in different IFRS are minimum disclosure requirements. Apart from IFRS requirement management can disclose other information if the information is judged as material. At each reporting date, management of an entity should review earlier disclosures.
Material misstatements identified before issuance of Financial statements
As per the draft, if management identified any material misstatements before the issuance of financial statements, the management should amend the financial statement.
Stakeholders can submit their comments on IASB website by 26 Feb 2016.