General characteristics of materiality (AASBPS2_12-17_COMPmay19_01-20)

The Conceptual Framework for Financial Reporting as identified in AASB 1048 Interpretation of Standards (the Conceptual Framework) provides the following definition of material information (paragraph 7 of AASB 101 Presentation of Financial Statements provides a similar definition^[1]):

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial reports make on the basis of those reports, which provide financial information about a specific reporting entity. In other words, materiality is an entity‑specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report.^[2]  

Notwithstanding paragraph 5, in respect of AusCF entities, the Framework for the Preparation and Presentation of Financial Statements as identified in AASB 1048 Interpretation of Standards (the Framework) provides the following definition of material information (paragraph 7 of AASB 101 Presentation of Financial Statements provides a similar definition^[1]):

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial reports make on the basis of those reports, which provide financial information about a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report.^[AusCF2] 

When making materiality judgements, an entity needs to take into account how information could reasonably be expected to influence the primary users of its financial statements—its primary users—when they make decisions^[3] on the basis of those statements (see paragraphs 13–23).^[4]

The objective of financial statements is to provide financial information about a reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.^{[5], [AusCF5]} The entity identifies the information necessary to meet that objective by making appropriate materiality judgements.       

The need for materiality judgements is pervasive in the preparation of financial statements. An entity makes materiality judgements when making decisions about recognition, measurement, presentation and disclosure. Requirements in Australian Accounting Standards only need to be applied if their effect is material to the complete set of financial statements,^[6] which includes the primary financial statements^[7] and the notes. However, it is inappropriate for the entity to make, or leave uncorrected, immaterial departures from Australian Accounting Standards to achieve a particular presentation of its financial position, financial performance or cash flows.^[8]   

Australian Accounting Standards set out reporting requirements that the Australian Accounting Standards Board (Board) has concluded will lead to financial statements that provide information about the financial position, financial performance and cash flows of an entity that is useful to the primary users of those statements. The entity is only required to apply recognition and measurement requirements when the effect of applying them is material.

An entity need not provide a disclosure specified by an Australian Accounting Standard if the information resulting from that disclosure is not material. This is the case even if the Standard contains a list of specific disclosure requirements or describes them as ‘minimum requirements’. Conversely, the entity must consider whether to provide information not specified by Australian Accounting Standards if that information is necessary for primary users to understand the impact of particular transactions, other events and conditions on the entity’s financial position, financial performance and cash flows.^[9]

When assessing whether information is material to the financial statements, an entity applies judgement to decide whether the information could reasonably be expected to influence decisions that primary users make on the basis of those financial statements. When applying such judgement, the entity considers both its specific circumstances and how the information provided in the financial statements responds to the information needs of primary users.

Because an entity’s circumstances change over time, materiality judgements are reassessed at each reporting date in the light of those changed circumstances.

When making materiality judgements, an entity needs to consider the impact information could reasonably be expected to have on the primary users of its financial statements. Those primary users are existing and potential investors, lenders and other creditors—those users who cannot require entities to provide information directly to them and must rely on general purpose financial statements for much of the financial information they need.^{[10], [AusCF10]} In addition to those primary users, other parties, such as the entity’s management, regulators and members of the public, may be interested in financial information about the entity and may find the financial statements useful. However, the financial statements are not primarily directed at these other parties.^{[11],[AusCF11]}

The primary users of not-for-profit entity financial statements are existing and potential resource providers (such as investors, lenders and other creditors, donors and taxpayers), recipients of goods and services (such as beneficiaries, for example members of the community) and parties performing a review or oversight function on behalf of other users (such as advisors and members of parliament).^[12] Not-for-profit entities should read all references in this Practice Statement to ‘existing and potential investors, lenders and other creditors’ as a reference to this broader range of users.      

Because primary users include potential investors, lenders and other creditors, it would be inappropriate for an entity to narrow the information provided in its financial statements by focusing only on the information needs of existing investors, lenders and other creditors.

When making materiality judgements, an entity also considers that primary users are expected to have a reasonable knowledge of business and economic activities and to review and analyse the information included in the financial statements diligently.^{[13]  [AusCF13]}    

An entity needs to consider what type of decisions its primary users make on the basis of the financial statements and, consequently, what information they need to make those decisions.

The primary users of an entity’s financial statements make decisions about providing resources to the entity. Those decisions involve: buying, selling or holding equity and debt instruments, providing or settling loans and other forms of credit, and exercising rights while holding investments (such as the right to vote on or otherwise influence management’s actions that affect the use of the entity’s economic resources).^{[14], [AusCF14], [15], [AusCF15]} Such decisions depend on the returns that primary users expect from an investment in those instruments.     

The expectations existing and potential investors, lenders and other creditors have about returns, in turn, depend on their assessment of the amount, timing and uncertainty of the future net cash inflows to an entity, together with their assessment of management’s stewardship of the entity’s resources. ^{[16], [AusCF16], [17], [AusCF17]}    

In respect of not-for-profit entities, primary users are generally not concerned with obtaining a financial return on an investment in the entity. Rather, they are concerned with the ability of the entity to achieve its objectives (whether financial or non-financial), which in turn may depend, at least in part, on the entity’s prospects for future net cash inflows. Primary users will, for example, be interested in the capability of the entity’s resources to provide goods and services in the future (service potential). Such primary users may make resource allocation decisions in relation to not-for-profit entities in addition to, or that differ from, those related to for-profit entities. For example, parliaments decide, on behalf of constituents, whether to fund particular programmes for delivery by an entity, taxpayers decide who should represent them in government, donors decide whether to donate resources to an entity, and recipients decide whether they can continue to rely on the provision of goods and services from the entity or whether to seek alternative suppliers.^[18]

Consequently, an entity’s primary users need information about:

(a) the resources of the entity (assets), claims against the entity (liabilities and equity) and changes in those resources and claims (income and expenses); and

(b) how efficiently and effectively the entity’s management and governing board have discharged their responsibility to use the entity’s resources.^{[19], [AusCF19]}

Financial information can make a difference in decisions if it has predictive value, confirmatory value or both.^{[20], [AusCF20]} When making materiality judgements, an entity needs to assess whether information could reasonably be expected to influence primary users’ decisions, rather than assessing whether that information alone could reasonably be expected to change their decisions.    

The objective of financial statements is to provide primary users with financial information that is useful to them in making decisions about providing resources to an entity. However, general purpose financial statements do not, and cannot, provide all the information that primary users need.^{[21], [AusCF21]} Therefore, the entity aims to meet the common information needs of its primary users. It does not aim to address specialised information needs—information needs that are unique to particular users.

To meet the common information needs of its primary users, an entity first separately identifies the information needs that are shared by users within one of the three categories of primary users defined in the Conceptual Framework—for example investors (existing and potential)—then repeats the assessment for the two remaining categories—namely lenders (existing and potential) and other creditors (existing and potential). The total of the information needs identified is the set of common information needs the entity aims to meet.

Notwithstanding paragraph 22, in respect of AusCF entities, to meet the common information needs of its primary users, an entity first separately identifies the information needs that are shared by users within one of the three categories of primary users defined in the Framework—for example investors (existing and potential)—then repeats the assessment for the two remaining categories—namely lenders (existing and potential) and other creditors (existing and potential). The total of the information needs identified is the set of common information needs the entity aims to meet.

In respect of not-for-profit entities, the identification of common information needs of primary users also involves an entity assessing the information needs that are shared by users within the other categories of primary users identified in paragraph Aus13.1.

In other words, the assessment of common information needs does not require identifying information needs shared across all existing and potential investors, lenders and other creditors. Some of the identified information needs will be common to all categories, but others may be specific to only one or two of those categories. If an entity were to focus only on those information needs that are common to all categories of primary users, it might exclude information that meets the needs of only one category.

The primary users of financial statements generally consider information from sources other than just the financial statements. For example, they might also consider other sections of the annual report, information about the industry an entity operates in, its competitors and the state of the economy, the entity’s press releases as well as other documents the entity has published.

However, the financial statements are required to be a comprehensive document that provides information about the financial position, financial performance and cash flows of an entity that is useful to primary users in making decisions about providing resources to the entity. Consequently, the entity assesses whether information is material to the financial statements, regardless of whether such information is also publicly available from another source.

Moreover, public availability of information does not relieve an entity of the obligation to provide material information in its financial statements.