Accounting Alert

This Accounting Alert is issued to circulate Insurance Commission (IC) Circular Letter No. 2022-17 (the Circular) dated March 18, 2022.

The Insurance Commission, in its Circular Letter No. 2022-17 dated 18 March 2022, released guidelines in determining materiality threshold consistent with the Securities and Exchange Commission.  Materiality depends on the nature or magnitude of information, or both.

Materiality Test

For the purpose of evaluating whether the information is material, quantitative and qualitative tests shall be applied by the external auditors and/or auditing firms:

1.Quantitative Test

Deficiency or inconsistency in the disclosures of the financial statements and misstatements that may result from a deviation from prescribed policy, misrepresentation, fraud or error shall be considered material if the information involves a transaction, amount or account that represents:

• Ten percent (10%) or more of the total of related accounts or transactions for lnsurance Commission Regulated Entities (ICRE), non-publicly listed and not part of a multinational company; and, 
• Five percent (5%) or more of the total of related accounts or transactions for ICRE, publicly listed and/or part of a multinational company.

2. Qualitative Test

ln order to identify material misstatement or error, qualitative factors shall be considered which involve determination whether the misstatement, fraud or error:

• Affects the economic decisions of primary users of the financial statements; 
• Affects the overall accuracy of the financial statements; 
• Affects the entity's compliance with covenants under debt or similar agreements, regulatory requirements or contractual requirements of operation and other agreements;
• Relates to the incorrect selection or application of an accounting policy that has immaterial effect on the current period's financial statements but is likely to have a material effect on future periods' financial statements; 
• Disguises a change in earnings or other trends, especially in the context of general economic and industry conditions; 
• Represents a recurring misstatement that is likely to continue in future periods; 
• lncreases management compensation or creates an award that otherwise would not have been achieved; 
• ls significant to users of the financial statements (e.g., in relation to forecast earnings); and, 
• Affects key ratios monitored by analysts or other key users of the financial statements.

Reportorial Requirement

The external auditor and/or audit firm shall include, applying the materiality test mentioned in this Circular, any discovered material deficiencies or inconsistencies in the disclosures and material misstatements resulting from deviation from prescribed policy, misrepresentation, fraud or error in the report as required in Section 4.3 of CL No. 2019-39, to be submitted directly to the Financial Examination Group (FEG) of the lC within 15 calendar days upon discovery.

Regulatory and Supervisory Enforcement

Non-compliance of any section of this Circular shall be considered as ground for suspension and/or delisting of external auditors and/or audit firms from the List of Accredited External Auditors.

Applicability

This Circular shall be applied to Audited Financial Statements for the year 2022 onwards.

See attached IC CL No. 2022-17 for further details.