Measuring risk – deciding what is material

aksaroya —  10 September 2012 — 1 Comment

James Bonner, independent sustainability consultant 

Materiality is defined by the IASB (International Accounting Standards Board) as ‘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.’ In other words – it is about making judgements on the significance/importance of the variety of issues that might be considered for inclusion in the financial reporting of organisations – both according to their nature (what they relate to) and their magnitude (how big they are). If something is material to an organisation, it should be reported on, if it is not material, then it does not necessarily need to be.

By its very nature, materiality is an inherently subjective concept, and difficult to set and define. It is quite obvious that making professional judgements on levels of materiality is integral to the financial reporting and auditing process. Consequently, to support practitioners, a number of bodies involved in the accounting sector – standard setters, regulators, sustainability reporting groups – have developed guidance on their understanding and perspective on the concept.  

The following table provides some excerpts from guidance/definitions of materiality from such bodies, and their sources. A number of the issues included, and terms used, are similar – but it is worth considering what/who some of the substantive terms in these definitions relate to. For example, who are the ‘users’ of the accounts referred to in these definitions, and what type of information is likely to influence their decisions about an organisation?

 

Of interest, several prominent sustainability reporting bodies make reference to the interests of wider stakeholders and broader organisational performance (including social and environmental issues) in their guidance – which, in doing so, extends the scope of what might merit inclusion as material issues in financial reporting.  More inclusive and wide ranging definitions of materiality will, obviously, have implications for the accounting sector, as practitioners will have to use their professional judgement on issues and topics which may be important to users of the financial statements.

This blog post intends to primarily support ACCA’s Accounting for the future, in particular the session ‘Measuring risk: Material or significant – what it means to me’ on Monday the 8th Of October by looking at some key bodies involved in the reporting and auditing process, and their definitions of the concept of materiality- an issue which will be discussed in greater detail in the session.

Additionally, a number of other presentations during the conference relate to the themes covered in this blog post:

Monday 8th October
11.30:12.39 Is Natural Capital a Material Issue?
14:00-15:30 Measuring risk: Material or significant – what it means to me
16:00-17:00 Practical Workshop: materiality matrices

Tuesday 9th October
12:30-13:30 Inclusive and Integrated – the future role of the CFO

Wednesday 10th October
12:30-13:30 Evolution of the Annual Report

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One response to Measuring risk – deciding what is material

  1. 
    Accountant Professional Liability 5 October 2012 at 2:36 pm

    Thanks for the regular accounting updates, we look to you for info.

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