Tip #1 to improve the financial statements – apply materiality in preparing the financial statements

Tip #1 to improve the financial statements – apply materiality in preparing the financial statements

The financial statements should provide users of the financial statements with relevant information that helps them to hold entities accountable and make decisions. Materiality helps preparers to determine what information will be relevant to users.

Materiality should be considered when formulating an entity’s accounting policies as well as deciding what information to present and disclose in the financial statements.

The Standards of GRAP only apply to material items. This means that an entity need not apply:

• The recognition and measurement principles in the Standards of GRAP when formulating an accounting treatment for an item that is immaterial. An entity develops its own accounting treatments for immaterial items. Examples include not applying the asset-related Standards to low value assets or transaction costs that are immaterial. GRAP 3 on Accounting Policies, Changes in Accounting Estimates and Errors provides guidance on the development of accounting policies.
• The presentation and disclosure requirements of the Standards if the effect of applying them is immaterial. For example, an entity may not separately present a type of asset on the face of the statement of financial position as required in GRAP 1 on Presentation of Financial Statements if it is immaterial.

Materiality is considered from both a quantitative and qualitative perspective. Thresholds and criteria should be developed to clearly identify what is material for an entity, as well as ensuring that consistent decisions are made by preparers when applying the Standards of GRAP to that entity.

Developing accounting policies and deciding what to present and disclose in the financial statements require judgement. Preparers should document their materiality considerations as well as discuss them with the relevant oversight structures, such as the audit committee.

The ASB’s Guideline on The Application of Materiality to Financial Statements provides guidance on how to apply materiality: https://www.asb.co.za/wp-content/uploads/2019/04/The-Application-of-Materiality-to-Financial-Statements.pdf.