The Financial Accounting Standards Board Proposes Materiality Improvements

By Baker Newman Noyes October 8, 2015

The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with generally accepted accounting principles (GAAP), while other matters are not as relevant.  The consideration of materiality is a matter of professional judgment; the objective is to ensure that decisions made by users of the financial statements would not be changed or influenced by the omission or misstatement of information. In determining materiality, consideration is given to both quantitative and qualitative factors.

On September 24, 2015, the Financial Accounting Standards Board (FASB) issued two exposure drafts for public comment related to its Disclosure Framework project.  The purpose of the Disclosure Framework is to improve the effectiveness of disclosures in notes to financial statements by more clearly communicating the information required by U.S. GAAP that is most important to the users of financial statements.

As part of the project, the exposure drafts address the use of materiality and helping organizations employ discretion when determining what disclosures in notes to financial statements should be considered material in their particular circumstances.  The exposure drafts address the following:

1. Materiality would be applied on a quantitative and qualitative basis to financial statement disclosures individually and in the aggregate, recognizing that while some disclosures are relevant to certain entities, they may not provide relevant information in other circumstances.
2. Materiality would be defined as a legal concept, based on a recent U.S. Supreme Court definition.
3. Omitting the disclosure of immaterial information would not be considered an accounting error. In fact, a reduction in volume due to omission of immaterial information may actually improve the effectiveness of financial statement disclosures.

This is yet another way that the FASB is putting forth effort to ensure the financial statements are transparent and are pertinent to the users of the financial statements.  As appropriately noted by Russell G. Golden, FASB Chairman, “Stakeholders indicated that the current discussion of materiality in our Conceptual Framework is inconsistent with the legal concept of materiality as established by the U.S. Supreme Court…  These proposals are intended to clarify materiality—which will help organizations improve the effectiveness of their disclosures by omitting immaterial information, and focus communication with users on the material, relevant items.”

The amendments to the Accounting Standards Update (ASU), Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material, would apply to all organizations including public and private companies, not-for-profit organizations, and employee benefit plans.  The FASB invites comments on all matters of this exposure draft by December 8, 2015.

For additional information, please review the exposure draft.

If you would like to discuss further, please call your BNN tax advisor at 1.800.244.7444.