General characteristics of materiality
Definition of material
5
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]
AusCF5
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.
6
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]
7
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.
See paragraph 7 of AASB 101 Presentation of Financial Statements.
Paragraph 2.11 of the Conceptual Framework for Financial Reporting (the Conceptual Framework).
Paragraph QC11 of the Framework for the Preparation and Presentation of Financial Statements (the Framework).
Throughout this Practice Statement, the term ‘decisions’ refers to decisions about providing resources to the entity, unless specifically indicated otherwise.
See paragraph 7 of AASB 101.
See paragraph 1.2 of the Conceptual Framework.
Notwithstanding footnote 5, in respect of AusCF entities, see paragraph OB2 of the Framework.
Materiality judgements are pervasive
8
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]
In this Practice Statement the phrases ‘complete set of financial statements’ and ‘financial statements as a whole’ are used interchangeably.
For the purposes of this Practice Statement, the primary financial statements comprise the statement of financial position, statement(s) of financial performance, statement of changes in equity and statement of cash flows.
See paragraph 8 of AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.
Recognition and measurement
9
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.
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Example A—materiality judgements on the application of accounting policies |
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Background An entity has a policy of capitalising expenditures on items of property, plant and equipment (PP&E) in excess of a specified threshold and recognising any smaller amounts as an expense. Application AASB 116 Property, Plant and Equipment requires that the cost of an item of PP&E is recognised as an asset when the criteria in paragraph 7 of AASB 116 are met. The entity has assessed that its accounting policy—not capitalising expenditure below a specific threshold—will not have a material effect on the current‑period financial statements or on future financial statements, because information reflecting the capitalisation and amortisation of such expenditure could not reasonably be expected to influence decisions made by the primary users of the entity’s financial statements. Provided that such a policy does not have a material effect on the financial statements and was not set to intentionally achieve a particular presentation of the entity’s financial position, financial performance or cash flows, the entity’s financial statements comply with AASB 116. Such a policy is nevertheless reassessed each reporting period to ensure that its effect on the entity’s financial statements remains immaterial. |
Presentation and disclosure
10
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]
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Example B—materiality judgements on disclosures specified by Australian Accounting Standards |
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Background An entity presents property, plant and equipment (PP&E) as a separate line item in its statement of financial position. Application AASB 116 Property, Plant and Equipment sets out specific disclosure requirements for PP&E, including the disclosure of the amount of contractual commitments for the acquisition of PP&E (paragraph 74(c) of AASB 116). When preparing its financial statements, the entity assesses whether disclosures specified in AASB 116 are material information. Even if PP&E is presented as a separate line item in the statement of financial position, not all disclosures specified in AASB 116 will automatically be required. In the absence of any qualitative considerations (see paragraphs 46–51), if the amount of contractual commitments for the acquisition of PP&E is not material, the entity is not required to disclose this information. |
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Example C—materiality judgements that lead to the disclosure of information in addition to the specific disclosure requirements in Australian Accounting Standards |
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Background An entity has its main operations in a country that, as part of an international agreement, is committed to introducing regulations to reduce the use of carbon‑based energy. The regulations had not yet been enacted in the national legislation of that country at the end of the reporting period. The entity owns a coal‑fired power station in that country. During the reporting period, the entity recorded an impairment loss on its coal‑fired power station, reducing the carrying amount of the power station to its recoverable amount. No goodwill or intangible assets with an indefinite useful life were included in the cash‑generating unit. Application Paragraph 132 of AASB 136 Impairment of Assets does not require an entity to disclose the assumptions used to determine the recoverable amount of a tangible asset, unless goodwill or intangible assets with an indefinite useful life are included in the carrying amount of the cash‑generating unit. Nevertheless, the entity has concluded that the assumptions about the likelihood of national enactment of regulations to reduce the use of carbon-based energy, as well as about the enactment plan, it considered in measuring the recoverable amount of its coal-fired power station could reasonably be expected to influence decisions primary users make on the basis of the entity’s financial statements. Hence, information about those assumptions is necessary for primary users to understand the impact of the impairment on the entity’s financial position, financial performance and cash flows. Therefore, even though not specifically required by AASB 136, the entity concludes that its assumptions about the likelihood of national enactment of regulations to reduce the use of carbon-based energy, as well as about the enactment plan, constitute material information and discloses those assumptions in its financial statements. |
See paragraphs 17(c) and 31 of AASB 101.
Judgement
11
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.
12
Because an entity’s circumstances change over time, materiality judgements are reassessed at each reporting date in the light of those changed circumstances.
Primary users and their information needs
13
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]
See paragraph 1.5 of the Conceptual Framework.
Notwithstanding footnote 10, in respect of AusCF entities, see paragraph OB5 of the Framework.
See paragraphs 1.9 and 1.10 of the Conceptual Framework.
Notwithstanding footnote 11, in respect of AusCF entities, see paragraphs OB9 and OB10 of the Framework.
Aus13.1
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.
See paragraph AusOB2.1 of the Framework.
14
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.
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Example D—existing and potential investors, lenders and other creditors |
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Background An entity is 100 per cent owned by its parent. Its parent provides the entity with semi-finished products that the entity assembles and sells back to the parent. The entity is entirely financed by its parent. The current users of the entity’s financial statements include the parent and the entity’s creditors (mainly local suppliers). Application The entity refers to the Conceptual Framework for Financial Reporting to identify the primary users of its financial statements—existing and potential investors, lenders and other creditors who cannot require the entity to provide information directly to them and must rely on general purpose financial statements. When making materiality judgements in the preparation of its financial statements, the entity does not reduce its disclosures to only those of interest to its parent or its existing creditors. The entity also considers the information needs of potential investors, lenders and other creditors when making those judgements. |
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Example AusCF D—existing and potential investors, lenders and other creditors |
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Background An entity is 100 per cent owned by its parent. Its parent provides the entity with semi-finished products that the entity assembles and sells back to the parent. The entity is entirely financed by its parent. The current users of the entity’s financial statements include the parent and the entity’s creditors (mainly local suppliers). Application The entity refers to the Framework for the Preparation and Presentation of Financial Statements to identify the primary users of its financial statements—existing and potential investors, lenders and other creditors who cannot require the entity to provide information directly to them and must rely on general purpose financial statements. When making materiality judgements in the preparation of its financial statements, the entity does not reduce its disclosures to only those of interest to its parent or its existing creditors. The entity also considers the information needs of potential investors, lenders and other creditors when making those judgements. |
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Example AusD.1—primary users in the not-for-profit private sector |
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Background A charity provides food and shelter for destitute people in Australia. The charity is financed from donations and government grants. Application When making materiality judgements in the preparation of its financial statements, the charity does not reduce its disclosures to only those of interest to its existing donors. The charity also considers the information needs of potential private donors and government grantors, service recipients and creditors when making those judgements. |
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Example AusD.2—primary users in the public sector |
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Background A local government prepares general purpose financial statements primarily for the information of ratepayers in the municipality. Application When making materiality judgements in the preparation of its financial statements, the local government does not reduce its disclosures to only those of interest to its existing ratepayers. The local government also considers the information needs of other service recipients, such as community clubs in the municipality, government grantors, parliamentarians (acting on behalf of taxpayers) and creditors, when making those judgements. |
See paragraph 2.36 of the Conceptual Framework.
Notwithstanding footnote 13, in respect of AusCF entities, see paragraph QC32 of the Framework.
Decisions made by primary users
16
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.
17
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.
See paragraph 1.2 of the Conceptual Framework.
Notwithstanding footnote 14, in respect of AusCF entities, see paragraph OB2 of the Framework.
[Deleted]
The International Accounting Standards Board (IASB) considers primary users’ resource allocation decisions to include decisions needed to exercise rights while holding investments, such as rights to vote on or otherwise influence management’s actions that affect the use of the entity’s economic resources. The IASB has clarified this point, which was previously implicit in the phrase ‘decisions to hold equity instruments’, in the revised Conceptual Framework. The AASB will review this guidance as part of its deliberations on the revised Framework.
18
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]
See paragraph 1.3 of the Conceptual Framework.
Notwithstanding footnote 16, in respect of AusCF entities, see paragraph OB3 of the Framework.
[Deleted]
Paragraph 1.3 of the IASB Exposure Draft ED/2015/3 Conceptual Framework for Financial Reporting (Conceptual Framework ED) proposed to reintroduce the term ‘stewardship’ and to explain explicitly that investors’, creditors’ and other lenders’ expectations about returns also depend on their assessment of management’s stewardship of the entity’s resources. The IASB has confirmed this in the revised Conceptual Framework. The AASB will review this guidance as part of its deliberations on the revised Framework.
Aus18.1
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]
See paragraphs AusOB2.1 and AusOB3.1 of the Framework.
19
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]
See paragraph 1.4 of the Conceptual Framework
Notwithstanding footnote 19, in respect of AusCF entities, see paragraph OB4 of the Framework.
20
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.
See paragraph 2.7 of the Conceptual Framework.
Notwithstanding footnote 20, in respect of AusCF entities, see paragraph QC7 of the Framework.
Meeting primary users’ information needs
21
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.
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Example E—primary users’ unique or individual information requests |
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Background Twenty investors each hold 5 per cent of an entity’s voting rights. One of these investors is particularly interested in information about the entity’s expenditure in a specific location because that investor operates another business in that location. Such information could not reasonably be expected to influence decisions that other primary users make on the basis of the entity’s financial statements. Application In making its materiality judgements, the entity does not need to consider the specific information needs of that single investor. The entity concludes that information about its expenditure in the specific location is immaterial information for its primary users as a group and therefore decides not to provide it in its financial statements. |
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Example AusE.1—primary users’ unique or individual information requests |
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Background A not-for-profit entity provides educational programs to community groups in Australia. Two hundred donors make financial contributions to the entity. One of these donors is particularly interested in a specific educational program run in regional Victoria. Such information could not reasonably be expected to influence the decisions that other primary users make on the basis of the entity’s financial statements. Application In making its materiality judgements, the entity does not need to consider the specific information needs of that single donor. The entity concludes that information about its educational program in regional Victoria is immaterial information for its primary users as a group and therefore decides not to provide it in its financial statements. |
See paragraph 1.6 of the Conceptual Framework.
Notwithstanding footnote 21, in respect of AusCF entities, see paragraph OB6 of the Framework.
22
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.
AusCF22
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.
Aus22.1
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.
23
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.
Impact of publicly available information
24
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.
25
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.
26
Moreover, public availability of information does not relieve an entity of the obligation to provide material information in its financial statements.
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Example F—impact of an entity’s press release on materiality judgements |
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Background An entity undertook a business combination in the reporting period. The acquisition doubled the size of the entity’s operations in one of its main markets. On the acquisition date, the entity issued a press release providing an extensive explanation of the primary reasons for the business combination and a description of how it obtained control over the acquired business, together with other information related to the acquisition. Application In preparing its financial statements, the entity first considered the disclosure requirements in AASB 3 Business Combinations. Paragraph B64(d) of AASB 3 requires an entity to disclose, for each business combination that occurs during the reporting period, ‘the primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree’. The entity concludes that information about the business combination is material because the acquisition is expected to have a significant impact on the entity’s operations, due to the overall size of the transaction compared with the size of the entity. In these circumstances, even though information relating to the primary reasons for the business combination and the description of how it obtained control is already included in a public statement, the entity needs to provide the information in its financial statements. |
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Example AusF.1—impact of continuous disclosure obligations on materiality judgements |
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Background A listed entity in Australia is a defendant in a lawsuit. According to the entity’s legal representatives, the possibility of any outflows in settlement is remote. ASX Listing Rule 3.1 requires the entity to disclose to the ASX information concerning the lawsuit that a reasonable person would expect to have a material effect on the price or value of the entity’s security. The notes to Listing Rule 3.1 provide examples of such information, which includes the entity becoming a plaintiff or defendant in a material lawsuit. Application AASB 137 Provisions, Contingent Liabilities and Contingent Assets states that contingent liabilities are not required to be disclosed in the financial statements if the possibility of outflows is remote. However, as the entity disclosed information about the lawsuit to the ASX to comply with Listing Rule 3.1, the entity would need to consider whether information related to the lawsuit is material to the financial statements and therefore required to be disclosed in the financial statements, despite the specific exception in AASB 137. Given the requirements of ASX Listing Rule 3.1, it is likely that any such disclosures related to Accounting Standards will also be material to the financial statements (ie a material impact on the price or value of a security is likely to influence user decisions). However, disclosures that are material for the purposes of the financial statements will not necessarily be required to be disclosed under ASX Listing Rule 3.1. The entity concludes in this instance that information about the lawsuit is material, despite the possibility of any settlement outflows being remote, as the lawsuit is for an amount that, if confirmed by the court, would result in a major deterioration in the financial position of the entity. |