International Accounting Standards Board
30 Cannon Street
London
EC4M 6XH
Grant Thornton International Ltd
Grant Thornton House
22 Melton Street
London NW1 2EP
22 February 2016
Submitted electronically through the IFRS Foundation website (www.ifrs.org)
ED/2015/8 IFRS Practice Statement: Application of Materiality to
Financial Statements
Grant Thornton International Ltd is pleased to comment on the International Accounting
Standards Board's (the Board) Exposure Draft ED/2015/8 IFRS Practice Statement: Application
of Materiality to Financial Statements (the ED). We have considered the ED, as well as the
accompanying draft Basis for Conclusions.
We support the Board's overall objectives in developing a Practice Statement on materiality.
These objectives align with the objectives of the wider Disclosure Initiative. We agree that
applying the materiality concept when preparing financial statements is challenging, especially
in relation to disclosures. Practical guidance on applying the materiality concept therefore has
the potential to help preparers make the necessary judgements. This project should also serve
to encourage constituents to make the behavioural changes that are one of the pre-conditions
to significant improvement in disclosure effectiveness.
We consider the ED itself to be a good starting point in providing this guidance. We believe
it could be even more useful if the guidance focussed on more practical examples which
illustrated entities' decisions to disclose or exclude information, particularly in areas involving
significant judgement.
Our responses to the ED's Invitation to Comment are set out in the Appendix.
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If you have any questions on our response, or wish us to amplify our comments, please
contact Sarah Carroll, Senior Manager, Global IFRS team ([email protected] or
telephone + 44 207 391 9548).
Yours sincerely,
Kenneth C Sharp
Global Leader - Assurance Services
Grant Thornton International Ltd
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Grant Thornton International Ltd
London office
Appendix: Responses to Invitation to Comment
Responses to Invitation to Comment questions
Question 1
A Practice Statement is not a Standard. The IASB’s reasoning for issuing guidance on
applying the concept of materiality in the financial statements in the form of a nonmandatory Practice Statement is set out in paragraphs BC10–BC15.
a) Do you think that the guidance should be issued as non-mandatory guidance?
Why or why not?
b) Do you think that a Practice Statement is the appropriate form for non-mandatory
guidance on applying the concept of materiality? Why or why not? If not, what
alternative(s) do you propose and why?
We support the proposal to issue non-mandatory guidance.
We note that the concept of materiality is pervasive to the preparation of financial statements
in accordance with IFRS. Accordingly, the application of materiality is not 'optional'.
However, we believe it is extremely difficult to mandate a particular approach to making the
necessary judgements to apply the materiality concept in practice. This reflects both the
significant level of judgement required and the very different facts and circumstances that will
legitimately influence different entities' judgements. We also believe that guidance along the
lines of the ED would be difficult to audit and enforce.
We also agree that a Practice Statement is an appropriate form in which to issue nonmandatory guidance of this nature.
Question 2
Do you find the examples helpful in the [draft] Practice Statement? Do you think any
additional practical examples should be included? If so, what scenarios should the
examples address? Please be as specific as possible and explain why those example(s)
would be helpful to entities.
We do not find the proposed examples particularly helpful. Some of the draft examples make
obvious statements that are of limited relevance to real-life challenges. Others relate to more
challenging issues but are too vague and /or abbreviated to illustrate how the necessary
judgement might be taken or the conclusion reached in so doing. The draft examples also
seem insufficiently linked to the guidance elsewhere in the ED.
We suggest the examples would be more useful if they are expanded more along the lines of
'case-study' scenarios. By this we mean they provide background information of the entity's
materiality judgement, and a step-by-step description of how the entity has applied the
guidance in the practice statement to judge which disclosures to make and which to leave out.
We appreciate that this may be hard to achieve. Developing case study-type examples will
demand an additional investment of resources. We also acknowledge that an illustrative
example cannot be expected to set out all the facts and circumstances that might influence
real-life judgements. Nonetheless, we encourage the Board to look into ways to enhance the
examples to help management, auditors and accounting enforcement bodies to tackle the real
challenges.
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Appendix: Responses to Invitation to Comment
We also suggest that it might be more helpful to place the examples in a separate 'illustrative
examples' section, and to cross-reference material from the examples to the applicable
guidance.
Comments on specific examples
To help explain our concerns we comment below on the specific draft examples in paragraph
53:
Example
Comment
53(a)
(IAS 16)
This example (on IAS 16) explains that an entity need not disclose
immaterial capital commitments. We agree with this statement but
suggest it is too obvious to be of real practical help.
53(b)
IAS 19
This example (on IAS 19) is one that could be more helpful if it was
more detailed. The background information provided is limited to
the fact that the entity has plans that are large or small.
Presently, this example has a conclusion that "for the smaller plans, it
may be sufficient to disclose only the key risks and sensitivities". This
is not particularly clear and suggests the entity would disclose 'nonkey' risks and sensitivities for its larger plans. Just because a plan is
large doesn’t necessarily mean a sensitivity analysis is required – for
example, if a plan was nearing the end of its term/life then there
would likely be limited volatility and as such a sensitivity analysis may
not be required
53(c)
IFRS 2
This example (on IFRS 2) could be expanded into a comprehensive
case study format. It touches on a practical issue many preparers
face: when an underlying item is material, and the Standard
prescribes several disclosures about that item, how does an entity
'filter' those disclosures (ie decide which of the IFRS 2 disclosures to
include and which to omit)?
This could be illustrated by providing some specific examples of an
IFRS 2 footnote (as if presented in a set of financial statements) in
which all possible disclosures have been made. Then, after having set
out some specific facts and circumstances and applying a materiality
judgement (which is fully explained), include an example of a revised
disclosure footnote.
53(d)
IFRS 8
This example refers to IFRS 8. This is a very prescriptive disclosureonly standard. Accordingly, it is not entirely clear what, if any, scope
exists to deviate from its specific requirements. The ED suggests
that there is scope to apply materiality judgements. If so we suggest
the example should be expanded to demonstrate the extent to the
ways the specific requirements of IFRS 8 are 'flexible' and how
materiality can be used to apply this flexibility.
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Appendix: Responses to Invitation to Comment
Question 3
The [draft] Practice Statement proposes guidance in three main areas:
a)
b)
c)
characteristics of materiality;
how to apply the concept of materiality in practice when presenting and
disclosing information in the financial statements; and
how to assess whether omissions and misstatements of information are
material to the financial statements.
It also contains a short section on applying materiality when applying recognition and
measurement requirements.
Please comment on the following and provide any suggestions you have for
improving the [draft] Practice Statement:
a)
Do you think that any additional content should be included in the Practice
Statement? If so, what additional content should be included and why?
We believe that the ED covers the appropriate areas, and generally in sufficient
detail. However, as noted in our response to Question 2, we believe the examples
should be enhanced.
We also believe the section on Omissions and Misstatements would be more useful if
it included an example or case study. One possible scenario could be for a decision
on whether a misstatement is material to the financial statements as a whole versus
whether it is material to a primary statement. A specific case study could be
developed and a reasonably detailed fact pattern provided together with the reasons
for the materiality conclusion reached.
b)
Do you think the guidance will be understandable by, and helpful to,
preparers of financial statements who have a reasonable level of
business/accounting knowledge and IFRS? If not, which
paragraphs/sections are unclear or unhelpful and why?
Overall we believe the guidance is understandable. We believe it could be more
helpful if it included some specific case studies as discussed in question 2. In
addition, we have some specific comments in relation to certain paragraphs which
could be improved. These have been included in the table at the end of the letter.
c)
Are there any paragraphs/sections with which you do not agree? If so, which
paragraphs/sections are they and why?
Refer to specific comments in the table at the end of the letter.
d)
Do you think any paragraphs/sections are unnecessary? If so, which
paragraphs/sections are they and why?
We are not convinced that the recognition and measurement section (paragraphs 61
onwards) is helpful or necessary. We do not disagree with the draft guidance
provided in this section but suggest that the main challenge relates to applying the
materiality concept to disclosures.
e)
Do you think any aspects of the guidance will conflict with any legal
requirements related to materiality within your jurisdiction, or a jurisdiction in
which you file financial statements?
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Appendix: Responses to Invitation to Comment
This response is from an international perspective and not specific to any particular
jurisdiction. That said, we are not aware of legal conflicts in any particular
jurisdiction.
Question 4
The IASB plans to issue the Practice Statement before the finalisation of its Principles
of Disclosure project.
The IASB has tentatively decided to include a discussion on the definition of
materiality, and whether there is a need to change or clarify that definition within
IFRS, in the Discussion Paper for its Principles of Disclosure project (expected to be
issued early in 2016). Nevertheless, the IASB thinks that to address the need for
guidance on the application of materiality, it is useful to develop the Practice
Statement now.
The IASB does not envisage that the discussion about the definition of materiality or
any other topics in its Principles of Disclosure project will significantly affect the
content of the Practice Statement. Nevertheless, the IASB will consider whether any
consequential amendments to the Practice Statement are necessary following the
completion of the Principles of Disclosure project. Do you agree with this approach?
We support the plan to proceed with a Practice Statement on materiality sooner rather than
waiting to complete the Principles of Disclosure project. The insights gained in finalising the
Practice Statement might also be useful in developing the Principles of Disclosure.
That said, some of the ideas under consideration for setting disclosure requirements in future
could interact with materiality assessments as part of the overall framework for deciding on
the information to disclose. For example, providing more detailed and granular disclosure
objectives would assist management in having a more specific context for assessing the
materiality of a possible disclosure item. Accordingly, we encourage the Board to reassess its
view that Principles of Disclosure project will not significantly affect the content of the
Practice Statement as the two projects proceed.
Question 5
Do you have any other comments on the [draft] Practice Statement? As mentioned in
Question 4, a discussion about the definition of materiality will be included in the
Discussion Paper in the Principles of Disclosure project, so the IASB is not asking for
comments on the definition at this time.
We have specific comments in relation to the following paragraphs:
Reference
Comment
7, 13-23
The definition of materiality refers to 'users' while the discussion in
paragraphs 13-23 refers to 'primary users'. We think the terminology should
be consistent.
14
This states: "Having identified the primary users of the entity’s general
purpose financial statements and other general purpose financial reports,
management should consider the characteristics of those users, including their
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Reference
Appendix: Responses to Invitation to Comment
Comment
likely interests and what types of decisions they are making".
As noted in paragraph 20 of the ED, the Conceptual Framework defines the
primary users (OB2) and discusses the types of decisions they make (OB3).
Most entities will have the types of user referred to in OB2, making the
decisions referred to OB3. However, paragraph 14 suggests that different
entities have different types of primary users making different types of
decisions. If the Board thinks this is the case, additional
explanation/examples would be helpful.
We also suggest providing a clearer link between this high level assessment of
the users and their needs and an entity's materiality decision (to include or
exclude a specific disclosure). The final Practice Statement would be more
useful if it illustrates how particular entities can use an assessment of their
specific users (and their information needs) to influence their judgements
about the materiality of specific information in financial statements.
Similar comments apply to paragraph 19.
16
This states: "Although management is entitled to assume that the primary
users have a reasonable knowledge of business and economic activities, they
cannot assume that the primary users are financial reporting experts".
We agree that not all primary users will be experts in financial reporting
disclosures. We think this statement would however be more helpful if it
explains how this could impact accounting policy disclosures. Specifically, on
how users' level of expertise affects the extent to which accounting policy
disclosures should explain the requirements of IFRS. This should then be
linked to the statement in paragraph 27(a).
22
We think these examples could be improved to provide preparers with more
practical guidance. Management may be able to obtain high level evidence
about the types of information that is important to users as suggested in (a)(d). However, it seems unlikely that the evidence obtained will apply at the
level of granularity required to make a materiality decision. The guidance
would be more useful if it explains and/or illustrates the linkage between
identification of primary users and their needs to detailed and granular
decisions about what disclosures to include or exclude.
23
This states: "Information is material if it confirms trends that could
reasonably be expected to reinforce decisions made by the primary users".
We believe information would be equally if not more material if it didn't align
with expected trends and therefore changed users' expectations.
33
We think the words "overall mix of information" could be improved so they
are more easily understood and less vague.
36
We agree that it is sometimes helpful to make 'negative statements' of the
type referred to in paragraph 36. However, we also think that negative
statements (eg "the company has no material capital commitments") are not
normally necessary or useful and can therefore contribute to clutter. We
suggest amending this guidance to avoid any suggestion that nil disclosures
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Reference
Appendix: Responses to Invitation to Comment
Comment
should routinely be provided.
46
This paragraph suggests that the materiality of information in the notes can
be assessed separately from the primary financial statements. This could cause
confusion, as most of the disclosures in the notes are there to explain
financial statements line items. If there is meant to be a separate level of
materiality for the notes to the financial statements compared to the primary
statements, we suggest this is clearly explained and an example provided.
50
The first sentence says "The disclosure requirements in IFRS are the basis for
management to decide what information should or should not be disclosed in
the notes". We believe this sentence should be revised. The disclosure
requirements in IFRS should be made unless the information is not material.
This sentence could be interpreted to mean management can decide what to
disclose using IFRS as a guide.
We think this paragraph would be more useful if it contained examples of
disclosures being omitted altogether.
54
79
We agree that intentional misstatements need particular attention. However
we do not think that a misstatement should be presumes to always be material
solely on the grounds that it is 'intentional'. We do agree that a misstatement
made with the intention of misleading users would be material, but in our
experience intentional misstatements are not always motivated by a desire to
mislead. An example might be a situation in which management decides not
to obtain an up-to-date fair value estimate on the grounds of cost.
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