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ESMA has published a Feedback Statement to its consultation paper ‘Considerations of Materiality in Financial Reporting’ following on from the Summary of Responses published in August 2012, and the public roundtable which took place in October 2012.
This Feedback Statement provides an overview of the views expressed by respondents to the questions in the CP as well as the feedback of participants at the Roundtable and sets out ESMA’s response to the issues arising from the consultation process.
A 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. In particular, user representatives signalled that they see a problem with how materiality is understood and applied. Examples were cited that preparers often do not provide information where IFRS does not explicitly mandate disclosure even though the information might be relevant and material while at the same time providing immaterial information that is not relevant to users.
Diversity in application was attributed to the exercise of management judgement, the various perspectives of different stakeholder groups as well as challenges to the 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 to the CP considered that proper application of the materiality concept could address this problem. Participants at the Roundtable suggested that the Disclosure Framework project being undertaken by the IASB might offer a potential solution to address the overload concerns. Participants also suggested that further education about the application of IFRSs in Europe might be required.
There was widespread agreement among respondents across all stakeholder groups 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 - doing so could lead to development of a ‘tick-box’ mentality rather than using of judgement in assessment of materiality. Furthermore, they suggested that as materiality is an aspect of considering relevance, the focus of the debate should be more on the qualitative rather than quantitative factors of materiality judgements.
The CP provided specific examples of instances where materiality judgements may be particularly sensitive. 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 standards and defeats the exercise of professional judgement.
A majority of respondents agreed that the impact of all uncorrected misstatements, including those of continuing applicability arising in earlier periods, should be considered when evaluating whether aggregate misstatements are material.
Among user representatives, there was some support for the inclusion of an accounting policy disclosure in financial statements in respect of materiality. However, respondents from other stakeholder groups were of the view that any such disclosures would become boilerplate, lacking entity-specific information. A number of user representatives did see merit in the provision of such information outside of financial statements.
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 that was not the case in practice for several reasons. Therefore, ESMA will address this issue with the IASB.