The IASB has amended its definition of material with effect from 1 January 2020, although entities are allowed to apply it earlier.
The purpose of this definition is to help companies decide which information should be included in the financial statements, and which not. Some stakeholders in fact were expressing concern that the old definition encouraged disclosure of immaterial information.
The Existing and Upcoming Definitions Compared
The previous definition of material was as follows:
“Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements”.
The forthcoming definition, on the other hand, is the following:
“Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the 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”.
Three salient differences appearing in the new definition are the following:
- The inclusion of ‘obscuring’: This clarifies that the inclusion of immaterial information could obscure material information.
- From ‘could […] influence’ to ‘could reasonably be expected to influence’: the original phrase results in the inclusion of too much information, since any information has potential – even if remote – to influence the decision of some users.
- The new definition refers to ‘primary users’, rather than ‘users’: this clarification restricts the targets of financial statements to existing and potential investors, lenders and creditors.
Which Accounting Standards are Impacted?
IAS 1 ‘Presentation of Financial Statements’ and IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ both include the definition of material. Moreover, these standards are impacted by this amendment.