Revised definition of materiality operative
REVISED DEFINITION OF MATERIALITY OPERATIVE
The definition of 'material' in AASB 101
Presentation of Financial Statements
has been amended and applies to the 31 December balance date for the first time. The changes made by AASB 2018-7
Amendments to Australian Accounting Standards – Definition of Material
are subtle but significant.
As materiality drives accounting standards' recognition, measurement, and disclosure, the revised definition and application guidance should significantly influence how boards, accountants and auditors make their financial-reporting decisions and disclosures.
The revised definition: 'Information is material if omitting, misstating or
obscuring
it could
reasonably be expected
to influence decisions that the
primary users
of general-purpose financial statements make based on those financial statements, which provide financial information about a
specific reporting entity
.' (Emphasis added.)
Materiality depends on the nature or magnitude of information, or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements taken as a whole.
Information is obscured if it is communicated in a way that would have a similar effect to omitting or misstating the information for financial-statement primary users.
Following are examples of circumstances that may result in material information being obscured:
- Information regarding a material item, transaction or other event is disclosed in the financial statements but the language used is vague or unclear
- Information regarding a material item, transaction or other event is scattered throughout the financial statements
- Dissimilar items, transactions or other events are inappropriately aggregated
- Similar items, transactions or other events are inappropriately disaggregated, and
- The understandability of financial statements is reduced because of material information being hidden by immaterial information to the extent that a primary user is unable to determine what information is material.
Assessing whether information could reasonably be expected to influence decisions made by primary users requires an entity to consider users' characteristics and its own circumstances.
Many existing and potential investors, lenders, and other creditors cannot require reporting entities to provide information direct to them and must rely on general-purpose financial statements for much of the financial information they need. Consequently, they are the primary users to whom general-purpose financial statements are directed.
Practice statement 2
Making Materiality Judgements and the
Framework applicable to NFPs should help in making materiality decisions.
