In September 2017, the International Accounting Standards Board (IASB) issued a non-mandatory practical guidance: International Financial Reporting Standards (IFRS) Practice Statement 2: Making Materiality Judgments (“PS2”). PS2 aims to address the “over-disclosure” issue, whereby preparers, seeking to comply with extensive IFRS disclosure requirements, include too much irrelevant information and not enough relevant information.
PS2 highlights that materiality judgements should be made based on the information needs of the primary users of financial statements, which are existing and potential investors, lenders and other creditors. PS2 applies a four-step process (“materiality process”) in making materiality judgements during the financial statements preparation process, as follows:
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PS2 also addresses the following circumstances when apply materiality judgement in preparing the financial statements:
- Prior-period information should be summarised and updated for primary users to understand the current-period financial statements.
- When determining whether a misstatement or omission is material, apply the above Step 1 and Step 2 of the materiality process. All material errors must be corrected to ensure compliance with IFRS Standards.
- Errors that have accumulated over time and have become material to the current period should be assessed. Cumulative error must be corrected if it is material to the current-period financial statements.
- In assessing whether material information about the existence and terms of a covenant or a covenant breach be included in the financial statements, consider the consequences of breaching a covenant would have on the company’s financial position, performance and cash flows; and the likelihood of breaching a covenant.
It is expected that PS2 will, among other benefits, help to enhance awareness of the role of materiality and promote positive changes in behaviour in the preparation of financial statements, such as rigid adherence to checklists. It is also expected that PS2 will encourage greater exercise of judgement in the preparation of financial reports, leading to a reduction in boilerplate disclosures and redundant information. As PS2 is not a mandatory financial reporting requirement, only time will tell if these objectives are achieved within the financial reporting community that includes regulators, preparers, and auditors.