Can decisions about materiality today affect future reporting periods?

The answer is no, unless an entity made an error in how it assesses and applies materiality.

Different views have been expressed about materiality decisions and their effect on future periods

Historically, preparers, auditors and others have expressed different views in practice about whether decisions can affect future reporting periods or not. Some were of the view that entities should assess whether past decisions about materiality could become material cumulatively over time, while others were of the view that decisions about materiality are period specific.

Given the diversity of views, the Board developed and issued a proposed Interpretation on The Effect of Past Decisions on Materiality (ED 185) for comment.

What does ED 185 say about materiality decisions?

GRAP 3 on Accounting Policies, Changes in Accounting Estimates and Errors is applied by entities when accounting policies are developed. Paragraph .07 indicates that “Standards of GRAP set out accounting policies that the ASB has concluded result in financial statements containing relevant and reliable information about the transactions, other events and conditions to which they apply. Those policies need not be applied when the effect of applying them is immaterial”.

This means that entities develop and apply:

• “Accounting policies” based on the principles in the Standards of GRAP for items, transactions and other events (“items”) that are material. For example, recognising assets in accordance with the principles in GRAP 17 on Property, Plant and Equipment.
   
• “Alternative accounting treatments” for items that are immaterial. These alternative accounting treatments should not be inconsistent with the Conceptual Framework for General Purpose Financial Reporting. For example, expensing items that would otherwise meet the definition of an asset in GRAP 17 because they are immaterial quantitatively and qualitatively.

Accounting policies and alternative accounting treatments are applied based on an assessment of materiality during the reporting period and at the reporting date. As a result, the assessment of, and decisions about materiality are period-specific, and do not affect subsequent reporting periods, unless an entity made an error (discussed below).

Materiality is assessed based on all the relevant facts and the circumstances that exist at the time of the assessment. The effect of applying materiality is assessed for items (or groups of items) individually as well as collectively. Accounting policies and alternative accounting treatments are applied consistently to similar items or groups of items.

If an entity applies an accounting policy for items that were previously immaterial, this is not a change in an accounting policy in terms of GRAP 3. As a result, no retrospective adjustments are made.

As GRAP 3 allows entities to apply the Standards of GRAP to material items only, applying alternative accounting treatments is not a departure from the Standards of GRAP, nor is it an error. ED 185 indicates that the following instances may give rise to errors in the application of materiality:

1. Immaterial items are omitted from the financial statements.
    
2. An inappropriate alternative accounting treatment is applied because of a failure to use, or misuse of, reliable information that was available or could reasonably have been expected to be used at the reporting date.
    
3. An alternative accounting treatment is applied to immaterial items to achieve a particular presentation or outcome in the financial statements.
    
4. An incorrect assessment of materiality is made resulting in material transactions being accounted for as immaterial transactions.

How can you access ED 185?

The Board needs your feedback on the proposals in ED 185. The comment deadline is 26 February 2021. ED 185 and supporting materials can be accessed by following this link.