The 47-page Practice Statement 2, Making Materiality Judgements, provides guidance on how to use judgment when selecting information to provide in financial statements prepared applying International Financial Reporting Standards (IFRS). It is not mandatory to use the guidance.

The IASB said that ‘some companies are unsure about how to make materiality judgements and have therefore used the disclosure requirements in IFRS standards as a checklist’. It wants to deter companies from taking this tick box approach and is calling for better use of judgment.

It encourages companies to apply judgment rather than simply using IFRS requirements as a checklist, so that financial statements focus on the information that is useful to investors.

The guidance may also help other parties involved in financial reporting to understand how a company makes materiality judgements in the preparation of financial statements.

The concept of materiality in the preparation of financial statements helps companies determine which information to include in and exclude from their reports. Companies make materiality judgments not only when deciding what information to disclose and how to present it but also when making decisions about recognition and measurement.

So for example, if a company makes a significant acquisition during a reporting period and publicises via a group press release, this is not sufficient public availability of information and does not relieve an entity of the obligation to provide material information in its financial statements.

There are of also local regulatory reporting requirements which may not be required under IFRS but need to form part of the financial statements and must be disclosed to ensure that material information is not obscured.

The Practice Statement:

• provides an overview of the general characteristics of materiality;
• presents a four-step process companies may follow in making materiality judgments when preparing their financial statements; and
• provides guidance on how to make materiality judgments in specific circumstances; namely, how to make materiality judgements about prior-period information, errors and covenants, and in the context of interim reporting.

Although this guidance is not mandatory, companies are permitted to apply this to financial statements prepared any time after 14 September 2017. It does not change or introduce any requirements in IFRS standards and does not affect IFRS compliance requirements.

Practice Statement 2 is designed to encourage behavioural change and provide support to companies making such judgments.

Hans Hoogervorst, chairman of the IASB, said: ‘The Practice Statement provides companies with the tools to make their financial statements more useful and concise. For change to happen, however, companies, auditors and regulators will have to work together.’

While some of the guidance in this Practice Statement may be useful to entities applying the IFRS for SMEs standard, it is not intended for those entities.

IFRS Practice Statement 2: Making Materiality Judgements (Practice Statement) is available to download here

The IFRS Project Summary and Feedback Statement on Making Materiality Judgments, Practice Statement 2