AASB issues Practice Statement 2 Making Materiality Judgements
In December 2017, the Australian Accounting Standards Board (AASB) approved the International Accounting Standards Board’s Practice Statement 2 Making Materiality Judgements as an Australian Practice Statement. It provides practical guidance for directors, trustees and preparers of financial statements when making judgements about what is material to the financial statements.
The Australian Practice Statement is essentially the same as its international equivalent, except that the AASB has added specific guidance for not-for-profit entities (NFPs).
Not-for-profit entity additional guidance
Guidance relating to NFPs is included in the Practice Statement as additional ‘Aus’ paragraphs and examples, and basically ‘translates’ some of the principals into not-for-profit language and concepts. For example, the Australian Practice Statement highlights that for NFPs:
- Primary users are existing and potential resource providers such as donors and taxpayers, rather than investors and lenders to for-profit entities
- Primary users can also be recipients of goods and services, such as beneficiaries, and members of the community, as well as those performing an oversight function (e.g. members of parliament)
- Primary users are more concerned with the NFP achieving its objectives and future service potential than making a financial return
- Information needs of primary users are identified in a similar manner to for-profit entities (i.e. the total information needs of all primary user categories is the set of common information the entity needs to provide)
- Step 1 in the materiality process involves identifying additional information that users might need to make decisions about resource allocation, such as information about the service potential of existing resources, and explanation about any significant impairment
- It may not be appropriate to assess materiality quantitatively by reference to profitability because NFPs are primarily concerned with achieving objectives such as service delivery rather than profit
- Information about the existence and terms of a grant agreement relating to a NFP is assessed in a similar manner to loan covenants (e.g. breaches) of for-profit entities.
More information
For more information - please read Accounting News article, IASB issues guidance on making materiality judgements (IFRS Practice Statement 2 Making Materiality Judgements) (October 2017).