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In November 2011, ESMA issued a consultation paper entitled ‘Considerations of Materiality in Financial Reporting’ to contribute to a consistent application of the concept of materiality in financial reporting. This summary of responses provides an overview of the views expressed by respondents to the questions in the Consultation Paper.
The majority of respondents considered that the concept of materiality is generally well understood, but many respondents expressed the view that there is diversity in application. However, the user representative category was more divided on the issue with over half of those responding expressing the view that the materiality concept was not clearly and consistently understood.
Diversity in application was a recurring theme raised by many respondents. This diversity was attributed to the exercise of management judgement, the separate perspectives of different stakeholder groups, as well as challenges to proper application of the concept of materiality.
Responses across most stakeholder groups raised concerns about the length of disclosures reaching the point where they could obscure readers’ understanding of the entity’s financial position and performance. Many respondents considered that proper application of the materiality concept could address this problem.
There was widespread agreement among respondents that if further guidance was required in respect of the application of materiality, it should be addressed by the IASB, rather than by ESMA. Several respondents noted that the involvement of the IAASB would also be necessary.
A majority of respondents expressed the view that there was no evidence of any significant divergence in practice in the assessment of materiality between financial reporting and auditing arising from different terminologies used in their respective standards. However, a number of the user representatives mentioned the need for greater consistency between accounting and auditing standards.
Most respondents highlighted the role of qualitative as well as quantitative aspects in materiality assessments. Several respondents maintained that the qualitative and quantitative aspects of materiality judgements cannot be separated without driving a ‘tick-box’ mentality to its determination.
The Consultation Paper provided specific examples of instances where an assessment of materiality may require particular consideration or where a materiality threshold may be lower. However, a common theme in the responses was that the provision of lists of items to be considered in materiality judgements was not considered desirable. This was because such a list could not be exhaustive, or alternatively that it was not in line with principle-based regulation and defeats the exercise of professional judgement.
A majority of respondents agreed that the impact of all misstatement and omissions, including those of continued applicability which arose in earlier periods, should be assessed in determining materiality decisions. A majority also agreed that uncorrected immaterial errors, aggregation of individually immaterial misstatements or omissions, netting of misstatements and accumulated misstatements should be considered in materiality assessments.
There was little support for the inclusion of an accounting policy disclosure in financial statements in respect of materiality, with most respondents of the view that any such disclosures would become boilerplate, lacking entity-specific information. However, a number of user representatives did see merit in the provision of such information, either in the notes to the financial statements or as part of the report to the audit committee.
Most respondents were clearly not supportive of the view that the omission of required notes containing additional information about a material line item constitutes a misstatement. Those who explicitly supported the view outlined in the paper were all user representatives.
Amongst all stakeholder groups the vast majority agreed that when determining the materiality applying to notes which do not relate directly to financial statement items the same considerations should apply as in determining the materiality of financial statement items.
The majority of respondents were of the opinion that the principles to be applied in assessing materiality in interim and annual financial reports should be the same. However, many respondents share the view that, although the assessment should be the same, in practice it is not for several reasons (e.g. interim financial measurements rely more on estimates and interim financial statements have a different purpose as they are only intended to provide an update on the latest complete set of annual financial statements).
Given the range of views expressed and in order to clarify the views further, ESMA has decided to organise a public roundtable on materiality in financial reporting where some of the issues raised in the Consultation Paper will be discussed. This summary of responses was prepared to facilitate discussion at the roundtable.