Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, 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. Consequently, the IFRS cannot specify a uniform quantitative threshold for materiality or predetermine what could be major in a particular situation.
US GAAP, for instance, states that items are material if “they could … influence the economic decisions of [financial statement] users…”. In other words, such errors can mislead decision makers.
Use in FRS
Its mean that material/major items of same nature should be reported separately in financial statement and dissimilar items may be aggregate if these are immaterial/not significant. Each major class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only if the are individually not significant. Each major class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only if the are individually not significant. [IAS1 29]
Financial statements result from processing large numbers of transactions or other events that are aggregated into classes according to their nature or function. The final stage in the process of aggregation and classification is the presentation of condensed and classified data, which form line items in the financial statements. If a line item is not individually material, it is aggregated with other items either in those statements or in the notes. An item that is not sufficiently material to warrant separate presentation in those statements may warrant separate presentation in the notes. [IAS1 30]
When applying this and other IFRSs an entity shall decide, taking into consideration all relevant facts and circumstances, how it aggregates information in the financial statements, which include the notes. An entity shall not reduce the understandability of its financial statements by obscuring major information with not significant information or by aggregating material items that have different natures or functions. [IAS1 30A]
Some IFRSs specify information that is required to be included in the financial statements, which include the notes. An entity need not provide a specific disclosure required by an IFRS if the information resulting from that disclosure is not material. This is the case even if the IFRS contains a list of specific requirements or describes them as minimum requirements. An entity shall also consider whether to provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance. [IAS1 31]
Use in the annual report to Shareholders
The Annual Report to shareholders includes one version of the entity’s statements. Here, the entity is legally responsible for publishing statements that serve two purposes.
- Firstly, statements must enable shareholders to make informed decisions when electing directors. The entity, therefore, must disclose information about individual candidates that could influence a voting decision. Information for this purpose could include, for instance, information about potential conflicts of interest or family ties with the entity’s officers.
- Secondly, these statements enable shareholders and investors to evaluate the entity’s recent financial results and prospects for future business. As a result, the materiality concept requires full disclosure on everything that could influence a decision to hold, buy, or sell shares of stock. Relevant information here could include, for example::
- Transparent interpretation of recent performance
For this purpose, entities sometimes supplement IFRS-required metrics such as Net Income with particular income metrics such as EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization)
- Analysis of the entity’s competitive situation
- Disclosure of forthcoming lawsuits or government penalties
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