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FEE notes, though, the importance of explicitly mentioning in the Practice Statement that materiality should be looked at in the context of the financial statements as a whole, and not only when disclosing information in the notes.
FEE believes that the Practice Statement can be used as the basis to assist preparers on applying the concept of materiality but it needs some improvements to be a practical tool. Additionally, it can facilitate other stakeholders to understand the approach that management develops when making judgments about materiality in the preparation of the financial statements.
FEE also supports the IASB’s decision to issue the document as a Practice Statement in a non-mandatory form as FEE believes it will avoid the potential risks of conflicting with national laws and/or legal requirements.
In FEE´s view, despite the fact that the Practice Statement can assist management in assessing materiality, FEE observes that in practice it is likely, in terms of making a change in the behaviour of preparers, to be insufficient. For example, a decision to disclose or not certain information might expose management and auditors to the risk of being criticised by another stakeholder (e.g. regulators, court, shareholders) which might take a different view on the materiality assessment. Although materiality should be perceived through the eyes of users, preparers might not perceive the value added to users when being more selective on information provided, noting that the related process to achieve this outcome might be perceived as burdensome, time consuming and potentially giving rise to delays in the issuance of financial statements.
In this regard, FEE believes that only a collaborative change in the relationship between regulators, auditors and preparers could ultimately contribute to a change in behaviour. In FEE´s recent publication: the Future of Corporate Reporting, FEE includes a discussion regarding the efforts that are needed from the policy makers and regulators to achieve a change in behaviour that enables the change and innovation in the future.
To this end, FEE also believes that it is important that the IASB considers how the nature and content of this document could potentially affect other constituents and in particular auditors. While the ISA 320 clarifies that the concept of materiality is an accounting concept which is defined by the applicable financial reporting framework, FEE is aware that the IAASB has been asked by some of its stakeholders, in particular by regulators, to provide more guidance for auditors on the application of materiality. Therefore, FEE suggests that the interrelationship of how the concept of materiality is applied in different contexts is further explored and better articulated in cooperation with the IAASB.