Friday, April 20, 2012

IASB Advisory Group Examines Issues Around Materiality

The Capital Markets Advisory Committee of the IASB reached a general consensus that improving the quality of disclosures may not be achieved by simply reducing the disclosure requirements.  Some CMAC members indicated that today’s problem with disclosures may not be the accounting standard’s disclosure requirements but the behavior and judgment relating to the concept of materiality.  There is a concern that preparers are not exercising enough judgement when determining what information to disclose.  The work of the auditor and regulator plays an important factor. 

There were different views about whether a disclosure project could have short-term vs. long-term objectives.  Some CMAC members talked about whether there should be only a framework project, or an individual IFRS with disclosures. Some CMAC members highlighted that the IASB has already received information from users of financial statements about which current IFRS disclosures could be improved as ‘quick wins’.  They also discussed the need to address the issue of what should be on the face of the financial statements and what should be in the notes.  Furthermore, CMAC members discussed whether the IASB could explore new approaches to disclosures; for example, layering of information.  CMAC members concluded by stating the importance of involving users of financial statements in all future disclosure project efforts to make sure that the disclosures provided are relevant to their work.  

European Securities and Markets Authority (ESMA) representatives gave a presentation about their November 2011 consultation 
paper considerations of materiality in financial reporting (which was available for public comment until 29 February 2012).  They
suggested that there should not be a focus on a quantitative assessment of materiality, but rather on the usefulness of the information being provided.  Materiality would often be based on a percentage figure of the balance sheet or the profit and loss account.
  
ESMA observed that preparers, auditors and regulators have different understandings of materiality.  He explained that the rationale behind ESMA’s project is to be helpful in implementing a principle-based standard by preventing misconceptions in different jurisdictions throughout Europe.  Although the CMAC was sympathetic to having consistent and comparable information, members expressed their concerns about the danger of materiality guidance being a means to challenge existing accounting requirements.  They suggested that the IASB and the International Auditing and Assurance Standards Board (IAASB) should work together on this topic.  

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