Can your decisions about materiality today affect future accounting?

We often hear from preparers that they don’t want to apply materiality because they are required to keep an ongoing record of these decisions, e.g. to expense rather than capitalise certain assets, to assess if these decisions become material over time. IGRAP 21 on The Effect of Past Decisions on Materiality was issued by the Board to address the question of whether decisions about materiality can have a ‘cumulative’ effect in later periods.

Materiality is a judgement made in a specific period based on information available when the assessment is made. By analogy, it is not all that different to assessing the useful lives of assets, or determining a discount rate for the measurement of assets and liabilities, etc. When determining materiality, preparers need to assess all available information, including information that could affect the future. For example: An entity is refurbishing its stadium and knows that it will be purchasing 100,000 chairs for the project. It procures 10,000 in year 1 and 90,000 in year 2. When the entity determines materiality in year 1, the information that is known about the future procurement in year 2 should be included in the assessment of materiality.

If an entity incorrectly assesses a materiality, this will be an error, and restatement will be required. Examples of what could be considered an error are discussed in IGRAP 21.

To help make decisions about materiality, preparers, auditors, and oversight bodies, are urged to read IGRAP 21 with The Guideline on Applying Materiality to Financial Statements.

Remember:

• Materiality is assessed by considering both qualitative criteria and quantitative thresholds. As entities in the public sector act in the public interest, qualitative considerations are often more relevant than absolute rand-values.
• Documenting judgements about materiality and the information used are critical. It is important to discuss these with management as well as oversight structures such as the Audit Committee or equivalent.

The Interpretation is effective from 1 April 2023, although earlier application is encouraged.

Access IGRAP 21 here.