27 January 2012

EFRAG: Draft comment letter on ESMA's 'Considerations of Materiality in Financial Reporting'

EFRAG welcomes the initiative taken by ESMA to stimulate debate on the concept of materiality and its application. However, should the need for further clarification emerge from this debate, EFRAG thinks that it is the role of the IASB to provide it. In EFRAG's view, that does not diminish but supports the critical role ESMA has to ensure consistent application across the European Union of IFRS as defined globally.

EFRAG notes that under the revised Framework "materiality" is an aspect of relevance, underscoring the need for the financial statements to provide information that is useful to users for economic decision-making. EFRAG believes that the materiality judgements should not be made in isolation, and that it is important that surrounding circumstances always be taken into account. Accordingly, whilst quantitative thresholds are helpful in highlighting the areas that require attention, they should never be applied mechanically without considering relevant qualitative factors.

The application of materiality to disclosures requires a greater level of judgement. Hence, the assessment of whether disclosures requirements are met should be made on the basis of the aggregate information, i.e. for example whether users are provided with relevant information to assist them in understanding a particular risk exposure. As a result, auditors or enforcers should not, in EFRAG's view, require additional disclosures if they cannot justify how the additional information could influence the users' economic decisions. It is EFRAG's view that the failure to apply materiality in practice appropriately is having a detrimental effect on the quality of information reported in the notes to financial statements. That problem has been widely reported on in recent studies, both in the EU and other jurisdictions. It was because of those issues that EFRAG and its partners commenced a project to consider developing a set of principles to guide disclosure requirements in IFRS. Materiality is one of the key principles being considered as part of that project. EFRAG intends later this year, with its partners the Autorité des Normes Comptables and the UK Accounting Standards Board, to issue a discussion paper about possible ways in which the IASB could ensure that the concept of materiality is actually applied. EFRAG is particularly grateful for the assistance ESMA is providing to that project.

Full paper

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