Accounting Alerts

Guidance on Making Materiality Judgments

The International Accounting Standards Board (IASB) issued International Financial Reporting Standards (IFRS) Practice Statement 2 entitled "Making Materiality Judgments". The Practice Statement encourages entities to apply judgement so that financial statements focus on information that is valuable to investors rather than trying to comply with an IFRS 'checklist'.

Background of and Main issues addressed by the Practice Statement

The concept of materiality is important in the preparation of financial statements because it helps entities determine which information shall be included in their reports. However, management often encounter uncertainty in applying the concept of materiality, thereby leading them to view the IFRS Standards as a checklist than a principle-based guide in judging which information would be most useful to investors and other stakeholders.

With this Practice Statement, the IASB is providing support to entities in making judgment on materiality and hopes to elevate behavior on financial reporting by promoting greater application of judgment. The Practice Statement provides guidance on the following:

 

(1) general characteristics of materiality

(2) interaction of laws and regulations with materiality

(3) a four-step materiality judgment process, and 

(4) specific application guidance on prior period information, errors, information about covenants and interim reporting.

The four-step materiality judgment process

The four step materiality judgment process requires the performance of the following procedures:

 The  Practice Statement is not a Standard and its application is not mandatory to comply with the IFRS. It does not change existing requirements but aims to provide guidance on making materiality judgments in preparing the financial statements.

Download the Guidance on Making Materiality Judgments.