Materiality

Question 1

IFRS Practice Statements 2 Making Materiality Judgements (IMPORTANT)

Answer 1

-statement aims to provide reporting entities with guidance on making materiality judgements when preparing general purpose financial statements in accordance with IFRS standards
-certain amount of judgement needed in deciding what is material and what is not, the board ISAB published this guidance that contains:
1. An overview of the vernal characteristics of materiality
2. A 4 step process for an entity to follow when making materiality judgements on preparing its financial statements and factors to consider in making those judgements

Question 2

Definition (IMPORTANT)

Answer 2

-> an item is material if omitting, misstating, or obscuring it would influence the economic decisions of financial statement users

Question 3

Four step process is as follows (IMPORTANT)

Answer 3

1. Identify information that could be material
2. Assess whether the info is material
3. Organise the info in the financial statements
4. Review the info in the draft financial statements

Question 4

When assessing whether info is material an entity should consider (IMPORTANT)

Answer 4

1. Quantitive factors = measures of revenue, profit, assets, and cash flows
2. Qualitative factors = related party transactions, unusual transactions, geography, and wider economic uncertainty

Question 5

How do we know if materiality judgements are appropriate

Answer 5

Proactive statement gives following guidance
-when assessing whether info is material to the financial statements, an entity applies judgement to decide whether the info could reasonably be expected to influence decisions that primary users make based on those financial statements
-when applying such judgement, the entity considers both its specific circumstances and how the info provided in the financial statements responds to the info needs of primary users
-because an entity’s circumstances change over time, materiality judgements are reassessed at each reporting date, considering those changed circumstances.

-> materiality judgements must be based on the needs of the primary users of the financial statements (current and potential investors, lenders, and creditors)
-> cannot meet individual needs but should aim to meet common information needs for each group of primary users

Question 6

Materiality judgements are relevant to

Answer 6

1. Recognition and measurement = an entity only needs to apply the recognition and measurement criteria in an IFRS standard when the effects are material
2. Presentation and disclosure = an entity only needs to apply the disclosure requirements in an IFRS standard if the resulting information is material

Question 7

When organising info entities should

Answer 7

1. Emphasise material matters
2. Ensure material info is not obscured by immaterial information
3. Ensure info is entity specific
4. Aim for simplicity and conciseness without omitting material detail
5. Ensure formats are appropriate and understandable
6. Provide comparable info
7. Avoid duplication