Specific topics (AASBPS2_12-17_COMPdec22_01-23)

Prior-period information

66

An entity makes materiality judgements on the complete set of financial statements, including prior-period^[31]information provided in the financial statements.

31

For this Practice Statement, ‘prior-period’ should be read as ‘prior-periods’ if financial statements include amounts and disclosures for more than one prior period.

67

Australian Accounting Standards require an entity to present information in respect of the preceding period for all amounts reported in the current-period financial statements.^[32]Furthermore, the Standards require the entity to provide prior-period information for narrative and descriptive information if it is relevant to understanding the current-period financial statements.^[33]Finally, the Standards require the entity to present, as a minimum, two statements of financial position, two statements of profit or loss and other comprehensive income, two statements of profit or loss (if presented separately), two statements of cash flows, two statements of changes in equity, and related notes.^[34]These requirements are the minimum comparative information identified by the Standards.^[35]

32

Except when Australian Accounting Standards permit or require otherwise. See paragraph 38 of AASB 101.

33

See paragraph 38 of AASB 101.

34

See paragraph 38A of AASB 101.

68

Assessing whether prior-period information is material to the current-period financial statements might lead an entity to:

(a) provide more prior-period information than was provided in the prior-period financial statements (see paragraph 70); or

(b) provide less prior-period information than was provided in the prior-period financial statements (see paragraph 71).

69

An entity also needs to consider any local laws or regulations, in respect of the prior-period information to be provided in financial statements, when making decisions on what prior-period information to provide in the current-period financial statements. Those local laws or regulations might require the entity to provide in the financial statements prior-period information in addition to the minimum comparative information required by the Standards. The Standards permit the inclusion of such additional information, but require that it is prepared in accordance with the Standards^[36]and does not obscure material information.^[37]However, an entity that wishes to state compliance with Australian Accounting Standards cannot provide less information than required by the Standards, even if local laws and regulations permit otherwise.

36

See paragraph 38C of AASB 101.

37

See paragraph 30A of AASB 101 and paragraph BC30F of the Basis for Conclusions on IAS 1.

Prior-period information not previously provided

70

An entity must provide prior-period information needed to understand the current-period financial statements,^[38]regardless of whether that information was provided in the prior-period financial statements—this requirement is not conditional on whether the prior-period information was provided in the prior-period financial statements. Consequently, the inclusion of prior-period information not previously included would be required if this is necessary for the primary users to understand the current-period financial statements.

Example L—prior-period information not previously provided
Background In the prior period, an entity had a very small amount of debt outstanding. Information about this debt was appropriately assessed as immaterial in the prior period, and so the entity did not disclose any maturity analysis showing the remaining contractual maturities or other information that would otherwise be required by paragraph 39(a) of AASB 7 Financial Instruments: Disclosures. In the current period, the entity issued a large amount of debt. The entity concluded that information about debt maturity was material information and disclosed it, in the form of a table, in the current-period financial statements. Application The entity might conclude that including a prior-period debt maturity analysis in the financial statements would be necessary for primary users to understand the current-period financial statements. In these circumstances, a narrative description of the maturity of the prior-period balances of the outstanding debt might be sufficient.

Example L—prior-period information not previously provided

Background

In the prior period, an entity had a very small amount of debt outstanding. Information about this debt was appropriately assessed as immaterial in the prior period, and so the entity did not disclose any maturity analysis showing the remaining contractual maturities or other information that would otherwise be required by paragraph 39(a) of AASB 7 Financial Instruments: Disclosures.

In the current period, the entity issued a large amount of debt. The entity concluded that information about debt maturity was material information and disclosed it, in the form of a table, in the current-period financial statements.

Application

The entity might conclude that including a prior-period debt maturity analysis in the financial statements would be necessary for primary users to understand the current-period financial statements. In these circumstances, a narrative description of the maturity of the prior-period balances of the outstanding debt might be sufficient.

Summarising prior-period information

71

Except to the extent required to comply with any local laws or regulations affecting the preparation of financial statements or their audit, an entity does not automatically reproduce in the current-period financial statements all the information provided in the prior-period financial statements. Instead, the entity may summarise prior-period information, retaining the information necessary for primary users to understand the current-period financial statements.

Example M—summarising prior-period information
Background An entity disclosed, in the prior-period financial statements, details of a legal dispute which led to the recognition, in that period, of a provision. In accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets the entity disclosed in the prior-period financial statements a detailed description of uncertainties about the amount and timing of possible cash outflows, in respect of the dispute, together with the major assumptions made concerning future events. Most of the uncertainties have been resolved in the current period, and, even though the liability has not been settled, a court pronouncement confirmed the amount already recognised in the financial statements by the entity. The entity considered the relevant local laws, regulations and other reporting requirements and concluded that there were no locally prescribed obligations relating to the inclusion of prior-period information in the current-period financial statements. Application In these circumstances, on the basis of the requirements in Australian Accounting Standards, the entity may not need to reproduce in the current-period financial statements all of the information about the legal dispute provided in the prior-period financial statements. Because most of the uncertainties have been resolved, users of the financial statements for the current period may no longer need detailed information about those uncertainties. Instead, information about those uncertainties might be summarised and updated to reflect the current-period events and circumstances and the resolution of previously reported uncertainties.

Example M—summarising prior-period information

Background

An entity disclosed, in the prior-period financial statements, details of a legal dispute which led to the recognition, in that period, of a provision. In accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets the entity disclosed in the prior-period financial statements a detailed description of uncertainties about the amount and timing of possible cash outflows, in respect of the dispute, together with the major assumptions made concerning future events.

Most of the uncertainties have been resolved in the current period, and, even though the liability has not been settled, a court pronouncement confirmed the amount already recognised in the financial statements by the entity.

The entity considered the relevant local laws, regulations and other reporting requirements and concluded that there were no locally prescribed obligations relating to the inclusion of prior-period information in the current-period financial statements.

Application

In these circumstances, on the basis of the requirements in Australian Accounting Standards, the entity may not need to reproduce in the current-period financial statements all of the information about the legal dispute provided in the prior-period financial statements. Because most of the uncertainties have been resolved, users of the financial statements for the current period may no longer need detailed information about those uncertainties. Instead, information about those uncertainties might be summarised and updated to reflect the current-period events and circumstances and the resolution of previously reported uncertainties.

38

See paragraph 38 of AASB 101.

Errors

72

Errors are omissions from and/or misstatements in an entity’s financial statements arising from a failure to use, or misuse of, reliable information that is available, or could reasonably be expected to be obtained.^[39]Material errors are errors that individually or collectively could reasonably be expected to influence decisions that primary users make on the basis of those financial statements. Errors may affect narrative descriptions disclosed in the notes as well as amounts reported in the primary financial statements or in the notes.

39

See paragraph 5 of AASB 108 (derived from the definition of prior-period errors).

73

An entity must correct all material errors, as well as any immaterial errors made intentionally to achieve a particular presentation of its financial position, financial performance or cash flows, to ensure compliance with Australian Accounting Standards.^[40]The entity should refer to AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors for guidance on how to correct an error.

40

See paragraph 41 of AASB 108.

74

Immaterial errors, if not made intentionally to achieve a particular presentation, do not need to be corrected to ensure compliance with Australian Accounting Standards. However, correcting all errors (including those that are not material) in the preparation of the financial statements lowers the risk that immaterial errors will accumulate over reporting periods and become material.

75

An entity assesses whether an error is material by applying the same considerations as outlined in the description of the materiality process. Making materiality judgements about errors involves both quantitative and qualitative considerations. The entity identifies information that, if misstated or omitted, could reasonably be expected to influence primary users’ decisions (as described in Step 1 and Step 2 of the materiality process). The entity also considers whether any identified errors are material on a collective basis (as described in Step 4 of the materiality process).

76

If an error is judged not to be material on its own, it might be regarded as material when considered in combination with other information. However, in general, if an error is individually assessed as material to an entity’s financial statements, the existence of other errors that affect the entity’s financial position, financial performance or cash flows in the opposite way does not make the error immaterial, nor does it eliminate the need to correct the error.

Example N—individual and collective assessment of errors
Background An entity has identified measures of its profitability as the measures of great interest to the primary users of its financial statements. During the current reporting period, the entity recognised: (a) an expense accrual of CU100^(a) that should not have been recognised. The accrual affected the line item ‘cost of services’. (b) the reversal of a provision of CU80 recognised in the previous period that should not have been reversed. The reversal affected the line item ‘other operating income (expense)’. Application In assessing whether these errors are material to its financial statements, the entity did not identify the presence of any qualitative factors and thus made its materiality judgement solely from a quantitative perspective. The entity concluded that both errors were individually material because of their impact on its profit. In these circumstances, it would be inappropriate to consider the quantitative effect of the errors on a net basis, ie as a CU20 overstatement of expenses, thereby concluding that the identified errors do not need to be corrected. If an error is individually assessed as material to the entity’s financial statements, the existence of other errors that affect the entity’s financial position, financial performance or cash flows in an opposite way, does not eliminate the need to correct it, or make the error immaterial. (a) In this example, currency amounts are denominated in ‘currency units’ (CU).

Example N—individual and collective assessment of errors

Background

An entity has identified measures of its profitability as the measures of great interest to the primary users of its financial statements. During the current reporting period, the entity recognised:

(a) an expense accrual of CU100^(a) that should not have been recognised. The accrual affected the line item ‘cost of services’.

(b) the reversal of a provision of CU80 recognised in the previous period that should not have been reversed. The reversal affected the line item ‘other operating income (expense)’.

Application

In assessing whether these errors are material to its financial statements, the entity did not identify the presence of any qualitative factors and thus made its materiality judgement solely from a quantitative perspective. The entity concluded that both errors were individually material because of their impact on its profit.

In these circumstances, it would be inappropriate to consider the quantitative effect of the errors on a net basis, ie as a CU20 overstatement of expenses, thereby concluding that the identified errors do not need to be corrected. If an error is individually assessed as material to the entity’s financial statements, the existence of other errors that affect the entity’s financial position, financial performance or cash flows in an opposite way, does not eliminate the need to correct it, or make the error immaterial.

(a) In this example, currency amounts are denominated in ‘currency units’ (CU).

Cumulative errors

77

An entity may, over a number of reporting periods, accumulate errors that were immaterial, both in individual prior periods and cumulatively over all prior periods. Uncorrected errors that have accumulated over more than one period are sometimes called ‘cumulative errors’.

78

Materiality judgements about cumulative errors in prior-period financial statements that an entity made at the time those statements were authorised for issue need not be revisited in subsequent periods unless the entity failed to use, or misused, information that:

(a) was available when financial statements for those periods were authorised for issue; and

(b) could reasonably be expected to have been obtained and taken into account in the preparation of those financial statements.^[41]

41

See paragraph 5 of AASB 108.

79

To assess whether a cumulative error has become material to the current-period financial statements, an entity considers whether, in the current period:

(a) the entity’s circumstances have changed, leading to a different materiality assessment for the current period; or

(b) further accumulation of a current-period error onto the cumulative error has occurred.

80

An entity must correct cumulative errors if they have become material to the current-period financial statements.

Example O—current-period assessment of cumulative errors
Background An entity, three years ago, purchased a plant. The plant has a useful life of 50 years and a residual value amounting to 20 per cent of the plant cost. The entity started to use the plant three years ago, but has not recognised any depreciation for it (cumulative error). In each prior period, the entity assessed the error of not depreciating its plant as being individually and cumulatively immaterial to the financial statements for that period. There is no indication that the materiality judgements of prior periods were wrong. In the current period, the entity started depreciating the plant. In the same period, the entity experienced a significant reduction in profitability (the type of circumstance referred to in paragraph 79(a) of the Practice Statement). Application When making its materiality judgements in the preparation of the current-period financial statements, the entity concluded that the cumulative error was material to the current-period financial statements. In this scenario, the entity does not need to revisit the materiality assessments it made in prior periods. However, because in the current period the cumulative error has become material to the current-period financial statements, the entity must apply the requirements in AASB 108 to correct it.

Example O—current-period assessment of cumulative errors

Background

An entity, three years ago, purchased a plant. The plant has a useful life of 50 years and a residual value amounting to 20 per cent of the plant cost. The entity started to use the plant three years ago, but has not recognised any depreciation for it (cumulative error). In each prior period, the entity assessed the error of not depreciating its plant as being individually and cumulatively immaterial to the financial statements for that period. There is no indication that the materiality judgements of prior periods were wrong.

In the current period, the entity started depreciating the plant.

In the same period, the entity experienced a significant reduction in profitability (the type of circumstance referred to in paragraph 79(a) of the Practice Statement).

Application

When making its materiality judgements in the preparation of the current-period financial statements, the entity concluded that the cumulative error was material to the current-period financial statements.

In this scenario, the entity does not need to revisit the materiality assessments it made in prior periods. However, because in the current period the cumulative error has become material to the current-period financial statements, the entity must apply the requirements in AASB 108 to correct it.

Information about covenants

81

An entity assesses the materiality of information about the existence and terms of a loan agreement clause (covenant), or of a covenant breach, to decide whether to provide information related to the covenant in the financial statements. This assessment is made in the same way as for other information, that is, by considering whether that information could reasonably be expected to influence decisions that its primary users make on the basis of the entity’s financial statements (see ‘A four-step materiality process’, from paragraph 33).

82

In particular, when a covenant exists, an entity considers both:

(a) the consequences of a breach occurring, that is, the impact a covenant breach would have on the entity’s financial position, financial performance and cash flows. If those consequences would affect the entity’s financial position, financial performance or cash flows in a way that could reasonably be expected to influence primary users’ decisions, then the information about the existence of the covenant and its terms is likely to be material. Conversely, if the consequences of a covenant breach would not affect the entity’s financial position, financial performance or cash flows in such a way, then disclosures about the covenant might not be needed.

(b) the likelihood of a covenant breach occurring. The more likely it is that a covenant breach would occur, the more likely it is that information about the existence and terms of the covenant would be material.

83

In assessing whether information about a covenant is material, a combination of the considerations in paragraph 82(a)–82(b) applies. Information about a covenant for which the consequences of a breach would affect an entity’s financial position, financial performance or cash flows in a way that could reasonably be expected to influence primary users’ decisions, but for which there is only a remote likelihood of the breach occurring, is not material.

Example P—assessing whether information about covenants is material
Background An entity has rapidly grown over the past five years and recently suffered some liquidity problems. A long-term loan was granted to the entity in the current reporting period. The loan agreement includes a clause that requires the entity to maintain a ratio of debt to equity below a specified threshold, to be measured at each reporting date (the covenant). According to the loan agreement, the debt-to-equity ratio has to be calculated on the basis of debt and equity figures as presented in the entity’s Australian-Accounting-Standards financial statements. If the entity breaches the covenant, the entire loan becomes payable on demand. The disclosure of covenant terms in an entity’s financial statements is not required by any local laws or regulations. Application Paragraph 31 of AASB 7 Financial Instruments: Disclosures requires an entity to disclose information that enables users of its financial statements to evaluate the nature and extent of risk arising from financial instruments to which the entity is exposed at the end of the reporting period. In the preparation of its financial statements, the entity assesses whether information about the existence of the covenant and its terms is material information, considering both the consequences and the likelihood of a breach occurring. In these circumstances, the entity concluded that, considering its recent liquidity problem, any acceleration of the long-term loan repayment plan (the consequence of the covenant breach occurring) would affect the entity’s financial position and cash flows in a way that could reasonably be expected to influence primary users’ decisions. The entity also considered the likelihood of a breach occurring. Scenario 1—the lender defined the covenant threshold on the basis of the three-year business plan prepared by the entity, adding a 10 per cent tolerance to the forecast figures In this scenario, even though the entity has historically met its past business plans, it assessed the likelihood of a breach occurring as higher than remote. Therefore, information about the existence of the covenant and its terms was assessed as material and disclosed in the entity’s financial statements. Scenario 2—the lender defined the covenant threshold on the basis of the three-year business plan prepared by the entity, adding a 200 per cent tolerance to the forecast figures In this scenario, the entity assessed the likelihood of a breach occurring as remote, on the basis of its historical track record of meeting its past business plans and the magnitude of the tolerance included in the covenant threshold. Therefore, although the consequences of the covenant breach would affect the entity’s financial position and cash flows in a way that could reasonably be expected to influence primary users’ decisions, the entity concluded that information about the existence of the covenant and its terms was not material.

Example P—assessing whether information about covenants is material

Background

An entity has rapidly grown over the past five years and recently suffered some liquidity problems. A long-term loan was granted to the entity in the current reporting period. The loan agreement includes a clause that requires the entity to maintain a ratio of debt to equity below a specified threshold, to be measured at each reporting date (the covenant). According to the loan agreement, the debt-to-equity ratio has to be calculated on the basis of debt and equity figures as presented in the entity’s Australian-Accounting-Standards financial statements. If the entity breaches the covenant, the entire loan becomes payable on demand. The disclosure of covenant terms in an entity’s financial statements is not required by any local laws or regulations.

Application

Paragraph 31 of AASB 7 Financial Instruments: Disclosures requires an entity to disclose information that enables users of its financial statements to evaluate the nature and extent of risk arising from financial instruments to which the entity is exposed at the end of the reporting period.

In the preparation of its financial statements, the entity assesses whether information about the existence of the covenant and its terms is material information, considering both the consequences and the likelihood of a breach occurring.

In these circumstances, the entity concluded that, considering its recent liquidity problem, any acceleration of the long-term loan repayment plan (the consequence of the covenant breach occurring) would affect the entity’s financial position and cash flows in a way that could reasonably be expected to influence primary users’ decisions.

The entity also considered the likelihood of a breach occurring.

Scenario 1—the lender defined the covenant threshold on the basis of the three-year business plan prepared by the entity, adding a 10 per cent tolerance to the forecast figures

In this scenario, even though the entity has historically met its past business plans, it assessed the likelihood of a breach occurring as higher than remote. Therefore, information about the existence of the covenant and its terms was assessed as material and disclosed in the entity’s financial statements.

Scenario 2—the lender defined the covenant threshold on the basis of the three-year business plan prepared by the entity, adding a 200 per cent tolerance to the forecast figures

In this scenario, the entity assessed the likelihood of a breach occurring as remote, on the basis of its historical track record of meeting its past business plans and the magnitude of the tolerance included in the covenant threshold. Therefore, although the consequences of the covenant breach would affect the entity’s financial position and cash flows in a way that could reasonably be expected to influence primary users’ decisions, the entity concluded that information about the existence of the covenant and its terms was not material.

Aus83.1

For not-for-profit entities, information about the existence and terms of a grant agreement is assessed similarly to the approach to loan agreement covenants. An entity assesses the materiality of information about the consequences of a breach of a grant agreement occurring, that is, the impact a breach would have on the entity’s financial position, financial performance and cash flows, as well as the likelihood of a breach occurring.

Example AusP.1—assessing whether information about grant conditions is material
Background A not-for-profit entity receives an annual grant from a government department under a three-year program that represents a material portion of the funding required by the entity in carrying out its activities. The grant agreement requires the funds to be spent by the entity in providing specified health services to nominated groups in regional areas of the State. If the entity breaches the grant agreement, the grantor can require the entity to repay the grant received for the current period in whole or in part or alternatively can decide not to provide further funding to the entity under the grant program. The entity recognises revenue under the grant agreement as the services are provided, in accordance with AASB 1058 Income of Not-for-Profit Entities, given the specificity of the health services to be provided. The entity has noted that other charities are now also providing significant health services in the areas in which it has traditionally worked. Consequently, the entity spent only 70 per cent of the grant in year two of the grant program. Application In the preparation of its financial statements, the entity assesses whether information about the existence of the grant agreement and its terms is material information, considering both the consequences and the likelihood of a breach occurring. In the circumstances, the entity concluded that its breach of the conditions of the grant would affect the entity’s financial position and cash flows in a way that could reasonably be expected to influence primary users’ decisions, especially if the department decided to cease providing the annual grant. Therefore, information about the existence of the grant agreement and its terms was assessed as material and disclosed in the entity’s financial statements.

Example AusP.1—assessing whether information about grant conditions is material

Background

A not-for-profit entity receives an annual grant from a government department under a three-year program that represents a material portion of the funding required by the entity in carrying out its activities. The grant agreement requires the funds to be spent by the entity in providing specified health services to nominated groups in regional areas of the State. If the entity breaches the grant agreement, the grantor can require the entity to repay the grant received for the current period in whole or in part or alternatively can decide not to provide further funding to the entity under the grant program.

The entity recognises revenue under the grant agreement as the services are provided, in accordance with AASB 1058 Income of Not-for-Profit Entities, given the specificity of the health services to be provided.

The entity has noted that other charities are now also providing significant health services in the areas in which it has traditionally worked. Consequently, the entity spent only 70 per cent of the grant in year two of the grant program.

Application

In the preparation of its financial statements, the entity assesses whether information about the existence of the grant agreement and its terms is material information, considering both the consequences and the likelihood of a breach occurring.

In the circumstances, the entity concluded that its breach of the conditions of the grant would affect the entity’s financial position and cash flows in a way that could reasonably be expected to influence primary users’ decisions, especially if the department decided to cease providing the annual grant.

Therefore, information about the existence of the grant agreement and its terms was assessed as material and disclosed in the entity’s financial statements.

Materiality judgements for interim reporting

84

An entity makes materiality judgements in preparing both annual financial statements and interim financial reports prepared in accordance with AASB 134 Interim Financial Reporting. In either case, the entity could apply the materiality process described in paragraphs 29–65. For its interim financial report, the entity considers the same materiality factors as in its annual assessment. However, it takes into consideration that the time period and the purpose of an interim financial report differ from those of the annual financial statements.

85

In making materiality judgements on its interim financial report, an entity focuses on the period covered by that report, that is:

(a) it assesses whether information in the interim financial report is material in relation to the interim period financial data, not annual data.^[42]

(b) it applies the materiality factors on the basis of both the current interim period data and also, whenever there is more than one interim period (eg in the case of quarterly reporting), the data for the current financial year to date.^[43]

(c) it may consider whether to provide in the interim financial report information that is expected to be material to the annual financial statements. However, information that is expected to be material to the annual financial statements need not be provided in the interim financial report if it is not material to the interim financial report.

Example Q—information that is expected to be material to the annual financial statements
Background An entity sells mainly standardised products to private customers in its home market. In the first half of the reporting period, 98 per cent of the entity’s revenue was generated by sales of Product X. The remaining revenue was principally derived from a pilot sale of a new product line—Product Y—that the entity planned to launch in the third quarter of the year. The entity expects revenue from Product Y to increase significantly by the end of the annual reporting period, so that Product Y will provide approximately 20 per cent of the entity’s revenue for the full annual period. Application Paragraph 114 of AASB 15 Revenue from Contracts with Customers requires an entity to disaggregate revenue recognised from contracts into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The entity did not identify any qualitative factors that made the amount of revenues from Product Y material to the interim period. In these circumstances, the entity concluded that the information about disaggregation of revenue by product lines was not material to the interim financial report and did not disclose it. In the preparation of the interim financial report, the entity is not required to disaggregate its revenue by product lines even if a greater level of disaggregation is expected to be required for the subsequent annual financial statements. In other words, although the entity expects that revenue by product lines will be material information for the annual financial statements, that fact does not influence the materiality assessment in the preparation of the entity’s interim financial report.

Example Q—information that is expected to be material to the annual financial statements

Background

An entity sells mainly standardised products to private customers in its home market. In the first half of the reporting period, 98 per cent of the entity’s revenue was generated by sales of Product X. The remaining revenue was principally derived from a pilot sale of a new product line—Product Y—that the entity planned to launch in the third quarter of the year. The entity expects revenue from Product Y to increase significantly by the end of the annual reporting period, so that Product Y will provide approximately 20 per cent of the entity’s revenue for the full annual period.

Application

Paragraph 114 of AASB 15 Revenue from Contracts with Customers requires an entity to disaggregate revenue recognised from contracts into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The entity did not identify any qualitative factors that made the amount of revenues from Product Y material to the interim period.

In these circumstances, the entity concluded that the information about disaggregation of revenue by product lines was not material to the interim financial report and did not disclose it. In the preparation of the interim financial report, the entity is not required to disaggregate its revenue by product lines even if a greater level of disaggregation is expected to be required for the subsequent annual financial statements. In other words, although the entity expects that revenue by product lines will be material information for the annual financial statements, that fact does not influence the materiality assessment in the preparation of the entity’s interim financial report.

42

See paragraphs 23 and 25 of AASB 134 Interim Financial Reporting.

43

Paragraph 20 of AASB 134 requires an entity to include in the interim financial report the statements of profit or loss and other comprehensive income for both periods, the current interim period and the current financial year to date.

86

Similarly, an entity may consider whether to provide information in the annual financial statements that is only material to the interim financial report. However, if information is material to the interim financial report, it need not be presented or disclosed subsequently in the annual financial statements if it is not material to those statements.

Example R—information that is only material to the interim financial report
Background An entity has identified measures of its profitability and cash flows as the measures of great interest to the primary users of its financial statements. During the interim period, the entity constructed a new chemical handling process to enable it to comply with environmental requirements for the production and storage of dangerous chemicals. Such an item of property, plant and equipment (PP&E) qualifies for recognition as an asset in accordance with paragraph 11 of AASB 116 Property, Plant and Equipment. Application Paragraph 74(b) of AASB 116 requires the disclosure of the expenditure recognised in the carrying amount of an item of PP&E in the course of its construction. In the preparation of the interim financial report, the entity assessed, both from a quantitative and qualitative perspective, the information about expenditure recognised in the carrying amount of the chemical handling process, concluded that information was material to the interim financial report and disclosed it. The entity incurred no further expenditure related to the chemical handling process in the second half of the annual reporting period. In the preparation of its annual financial statements, the entity assessed the expenditure recognised in the carrying amount of the chemical handling process against its annual profitability and cash flow measures and concluded that this information was not material to the annual financial statements. In reaching that conclusion, the entity did not identify any qualitative factors leading to a different assessment. The entity is not required to disclose information about the expenditure recognised in the carrying amount of its chemical handling process in its annual financial statements.

Example R—information that is only material to the interim financial report

Background

An entity has identified measures of its profitability and cash flows as the measures of great interest to the primary users of its financial statements. During the interim period, the entity constructed a new chemical handling process to enable it to comply with environmental requirements for the production and storage of dangerous chemicals. Such an item of property, plant and equipment (PP&E) qualifies for recognition as an asset in accordance with paragraph 11 of AASB 116 Property, Plant and Equipment.

Application

Paragraph 74(b) of AASB 116 requires the disclosure of the expenditure recognised in the carrying amount of an item of PP&E in the course of its construction.

In the preparation of the interim financial report, the entity assessed, both from a quantitative and qualitative perspective, the information about expenditure recognised in the carrying amount of the chemical handling process, concluded that information was material to the interim financial report and disclosed it.

The entity incurred no further expenditure related to the chemical handling process in the second half of the annual reporting period. In the preparation of its annual financial statements, the entity assessed the expenditure recognised in the carrying amount of the chemical handling process against its annual profitability and cash flow measures and concluded that this information was not material to the annual financial statements. In reaching that conclusion, the entity did not identify any qualitative factors leading to a different assessment.

The entity is not required to disclose information about the expenditure recognised in the carrying amount of its chemical handling process in its annual financial statements.

87

In assessing materiality, an entity also considers the purpose of interim financial reports, which differs from the purpose of annual financial statements. An interim financial report is intended to provide an update on the latest complete set of annual financial statements.^[44]Information that is material to the interim period, but was already provided in the latest annual financial statements, does not need to be reproduced in the interim financial report, unless something new occurs or an update is needed.^[45]

44

See paragraph 6 of AASB 134.

45

See paragraphs 15–15A of AASB 134.

Interim reporting estimates

88

When an entity concludes that information about estimation uncertainty is material, the entity needs to disclose that information. Measurements included in interim financial reports often rely more on estimates than measurements included in the annual financial statements.^[46]That fact does not, in itself, make the estimated measurements material. Nevertheless, relying on estimates for interim financial data to a greater extent than for annual financial data might result in more disclosures about such uncertainties being material, and thus being provided in the interim financial report, compared with the annual financial statements.

46

See paragraph 41 of AASB 134.

35

Paragraph 10(f) of AASB 101 also requires an entity to provide a statement of financial position as at the beginning of the preceding period when the entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements in accordance with paragraphs 40A–40D of AASB 101. (This is not required of entities applying Australian Accounting Standards – Simplified Disclosures)

Information about accounting policies

88A

Paragraph 117 of AASB 101 requires an entity to disclose material accounting policy information.

88B

Accounting policy information relating to immaterial transactions, other events or conditions is immaterial and need not be disclosed. Accounting policy information may nevertheless be material because of the nature of the related transactions, other events or conditions, even if the amounts are immaterial. An entity is required to disclose accounting policy information relating to material transactions, other events or conditions if that information is material to the financial statements.

88C

In assessing whether accounting policy information is material to its financial statements, an entity considers whether users of the entity’s financial statements would need that information to understand other material information in the financial statements. An entity makes this assessment in the same way it assesses other information: by considering qualitative and quantitative factors, as described in paragraphs 44–55. Diagram 2 illustrates how an entity assesses whether accounting policy information is material and, therefore, shall be disclosed.

88D

Paragraph 117B of AASB 101 includes examples of circumstances in which an entity is likely to consider accounting policy information to be material to its financial statements. The list is not exhaustive, but provides guidance on when an entity would normally consider accounting policy information to be material.

88E

Paragraph 117C of AASB 101 describes the type of material accounting policy information that users of financial statements find most useful. Users generally find information about the characteristics of an entity’s transactions, other events or conditions—entity-specific information—more useful than disclosures that only include standardised information, or information that duplicates or summarises the requirements of the Australian Accounting Standards. Entity-specific accounting policy information is particularly useful when that information relates to an area for which an entity has exercised judgement—for example, when an entity applies an Australian Accounting Standard differently from similar entities in the same industry.

88F

Although entity-specific accounting policy information is generally more useful, material accounting policy information could sometimes include information that is standardised, or that duplicates or summarises the requirements of the Australian Accounting Standards. Such information may be material if, for example:

(a) users of the entity’s financial statements need that information to understand other material information provided in the financial statements. Such a scenario might arise when an entity applying AASB 9 Financial Instruments has no choice regarding the classification of its financial instruments. In such scenarios, users of that entity’s financial statements may only be able to understand how the entity has accounted for its material financial instruments if users also understand how the entity has applied the requirements of AASB 9 to its financial instruments.

(b) an entity reports in a jurisdiction in which entities also report applying local accounting standards.

(c) the accounting required by the Australian Accounting Standards is complex, and users of financial statements need to understand the required accounting. Such a scenario might arise when an entity accounts for a material class of transactions, other events or conditions by applying more than one Australian Accounting Standard.

88G

Paragraph 117D of AASB 101 states that if an entity discloses immaterial accounting policy information, such information shall not obscure material information. Paragraphs 56–59 provide guidance about how to communicate information clearly and concisely in the financial statements.

Example S—making materiality judgements and focusing on entity-specific information while avoiding standardised (boilerplate) accounting policy information
Background An entity operates within the telecommunications industry. It has entered into contracts with retail customers to deliver mobile phone handsets and data services. In a typical contract, the entity provides a customer with a handset and data services over three years. The entity applies AASB 15 Revenue from Contracts with Customers and recognises revenue when, or as, the entity satisfies its performance obligations in line with the terms of the contract.
The entity has identified two performance obligations and related considerations: (a) the handset—the customer makes monthly payments for the handset over three years; and (b) data—the customer pays a fixed monthly charge to use a specified monthly amount of data over three years.
For the handset, the entity concludes that it should recognise revenue when it satisfies the performance obligation (when it provides the handset to the customer). For the provision of data, the entity concludes that it should recognise revenue as it satisfies the performance obligation (as the entity provides data services to the customer over the three-year life of the contract).
The entity notes that, in accounting for revenue it has made judgements about: (a) the allocation of the transaction price to the performance obligations; and (b) the timing of satisfaction of the performance obligations. The entity has concluded that revenue generated from these contracts is material to the reporting period.
Application The entity notes that for contracts of this type it applies separate accounting policies for two sources of revenue, namely revenue from: (a) the sale of handsets; and
(b) the provision of data services.
Having identified revenue from contracts of this type as material to the financial statements, the entity assesses whether accounting policy information for revenue from these contracts is, in fact, material.
The entity evaluates the effect of disclosing the accounting policy information by considering the presence of qualitative factors. The entity noted that its revenue recognition accounting policies: (a) were unchanged during the reporting period; (b) were not chosen from accounting policy options available in the Australian Accounting Standards; (c) were not developed in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors in the absence of an Australian Accounting Standard that specifically applies; and (d) are not so complex that primary users will be unable to understand the related revenue transactions without standardised descriptions of the requirements of AASB 15.
However, some of the entity’s revenue recognition accounting policies relate to an area for which the entity has made significant judgements in applying its accounting policies—for example, in deciding how to allocate the transaction price to the performance obligations, and the timing of revenue recognition.
The entity considers that, in addition to disclosing the information required by paragraphs 123–126 of AASB 15 about the significant judgements made in applying AASB 15, primary users of its financial statements are likely to need to understand related accounting policy information. Consequently, the entity concludes that such accounting policy information could reasonably be expected to influence the decisions of the primary users of its financial statements. For example, understanding: (a) how the entity allocates the transaction price to its performance obligations is likely to help users understand how each component of the transaction contributes to the entity’s revenue and cash flows; and (b) that some revenue is recognised at a point in time and some is recognised over time is likely to help users understand how reported cash flows relate to revenue.
The entity also notes that the judgements it made are specific to the entity. Consequently, material accounting policy information would include information about how the entity has applied the requirements of AASB 15 to its specific circumstances.
The entity, therefore, assesses that accounting policy information about revenue recognition is material and should be disclosed. Such disclosure would include information about how the entity allocates the transaction price to its performance obligations and when the entity recognises revenue.

Example T—making materiality judgements on accounting policy information that only duplicates requirements in the Australian Accounting Standards
Background Property, plant and equipment are material to an entity’s financial statements.
The entity has no intangible assets or goodwill and has not recognised an impairment loss on its property, plant or equipment in either the current or comparative reporting periods.
In previous reporting periods, the entity disclosed accounting policy information relating to impairment of non-current assets which duplicates the requirements of AASB 136 Impairment of Assets and provides no entity-specific information. The entity disclosed that:
The carrying amounts of the group’s intangible assets and its property, plant and equipment are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For goodwill and intangibles with an indefinite useful life, the recoverable amount is estimated at least annually.
An impairment loss is recognised in the statement of profit or loss whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. The recoverable amount of assets is the greater of their fair value less costs to sell and their value in use. In measuring value in use, estimated future cash flows are discounted to present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to that cash-generating unit and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. An impairment loss in respect of goodwill is not subsequently reversed. For other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount, but only to the extent that the new carrying amount does not exceed the carrying amount that would have been determined, net of depreciation and amortisation, if no impairment loss had been recognised.
Application Having identified assets subject to impairment testing as being material to the financial statements, the entity assesses whether the accounting policy information for impairment is, in fact, material.
As part of its assessment, the entity considers that an impairment or a reversal of an impairment had not occurred in the current or comparative reporting periods. Consequently, accounting policy information about how the entity recognises and allocates impairment losses is unlikely to be material to its primary users. Similarly, because the entity has no intangible assets or goodwill, information about its accounting policy for impairments of intangible assets and goodwill is unlikely to provide its primary users with material information.
However, the entity’s impairment accounting policy relates to an area for which the entity is required to make significant judgements or assumptions, as described in paragraphs 122 and 125 of AASB 101. Given the entity’s specific circumstances, it concludes that information about its significant judgements and assumptions related to its impairment assessments could reasonably be expected to influence the decisions of the primary users of the entity’s financial statements. The entity notes that its disclosures about significant judgements and assumptions already include information about the significant judgements and assumptions used in its impairment assessments.
The entity decides that the primary users of its financial statements would be unlikely to need to understand the recognition and measurement requirements of AASB 136 to understand related information in the financial statements.
Consequently, the entity concludes that disclosing a summary of the requirements in AASB 136 in a separate accounting policy for impairment would not provide information that could reasonably be expected to influence decisions made by the primary users of its financial statements. Instead, the entity discloses material accounting policy information related to the significant judgements and assumptions the entity has applied in its impairment assessments elsewhere in the financial statements.
Although the entity assesses some accounting policy information for impairments of assets as immaterial, the entity still assesses whether other disclosure requirements of AASB 136 provide material information that should be disclosed.