RSM Vietnam is pleased to present our IFRS Newsletter on the assessment of materiality in the preparation and presentation of financial statements. In this content, we will provide you with:
Changes in the concept of materiality as per the amended standard - IAS 01.
The process of assessing materiality - Practice Statement 2 Making Materiality
Conclusion
Materiality plays a crucial role in the preparation and presentation of financial reports (FR). Therefore, the improper application of the concept of materiality can lead to the inclusion of excessive non-material information in the FR. To assist management, some amendments to standards and guidance have been introduced to appropriately determine materiality, thereby enhancing the usefulness of financial information presented in the FR to the readers.
Introduction
On September 14, 2017, the International Accounting Standards Board (IASB) issued Practice Statement 2 Making Materiality. This Practice Statement:
Provides guidance on the materiality assessment process.
Is not a mandatory document.
Can be applied by entities in the preparation of financial statements (FS) prepared after September 14, 2017.
Additionally, in December 2018, the IASB announced amendments to narrow the scope of International Accounting Standard 01 (IAS 01) - Presentation of Financial Statements. These amendments:
Provide further clarity on the concept of "materiality."
Became effective on January 1, 2020 (Entities could apply them earlier if desired).
Changes in the concept of materiality over the amendment to IAS 01
Changes in the Concept of Materiality per the Amendment to IAS 01:
New Definition: Information is considered material if omissions, misstatements, or uncertainties in that information, when evaluated in the context of the reasonable decisions that users of the financial statements make, could influence those decisions.
Old Definition: Information is considered material if omitting or misstating that information, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users made on the basis of those financial statements.
The Difference: Information is considered material.
Materiality assessment process – Practice statement 2 making materiality
Conclusion
Practice Statement 2 provides clear and specific guidance to entities on the materiality assessment process when selecting relevant information for disclosure in financial statements. The amendments to IAS 01, along with the new guidance in Practice Statement 2, clarify the definition of materiality and make IFRSs more consistent. This will help entities provide disclosures about their accounting policies that are genuinely useful to financial statement users from a materiality perspective.