Making Materiality Judgements: IFRS Practice Statement 2

Making Materiality Judgements
IFRS Practice Statement 2

IFRS Practice Statement 2 Making Materiality Judgements was issued in September 2017 for
application from 14 September 2017. The text of the Basis for Conclusions is contained in
Part C of this edition.
Other Standards have made minor consequential amendments to IFRS Practice Statement
2 Making Materiality Judgements, including Amendments to References to the Conceptual
Framework in IFRS Standards (issued March 2018) and Definition of Material (Amendments to
IAS 1 and IAS 8) issued October 2018.
© IFRS Foundation B847

CONTENTS
from paragraph
INTRODUCTION IN1
IFRS PRACTICE STATEMENT 2 MAKING MATERIALITY

JUDGEMENTS
OBJECTIVE 1
SCOPE 3
GENERAL CHARACTERISTICS OF MATERIALITY 5
Definition of material 5
Materiality judgements are pervasive 8
Judgement 11
Primary users and their information needs 13
Decisions made by primary users 16
Meeting primary users’ information needs 21
Impact of publicly available information 24
INTERACTION WITH LOCAL LAWS AND REGULATIONS 27
MAKING MATERIALITY JUDGEMENTS 29
Overview of the materiality process 29
A four‑step materiality process 33
Step 1—identify 35
Step 2—assess 40
Step 3—organise 56
Step 4—review 60
SPECIFIC TOPICS 66
Prior‑period information 66
Prior‑period information not previously provided 70
Summarising prior‑period information 71
Errors 72
Cumulative errors 77
Information about covenants 81
Materiality judgements for interim reporting 84
Interim reporting estimates 88
APPLICATION DATE 89
APPENDIX
APPROVAL BY THE BOARD OF THE IFRS PRACTICE
STATEMENT 2 MAKING MATERIALITY JUDGEMENTS ISSUED IN
SEPTEMBER 2017
FOR THE BASIS FOR CONCLUSIONS, SEE PART C OF THIS EDITION
BASIS FOR CONCLUSIONS
B848 © IFRS Foundation

IFRS Practice Statement 2 Making Materiality Judgements (Practice Statement) is set out in
paragraphs 1–89. This Practice Statement should be read in the context of its objective
and Basis for Conclusions, as well as in the context of the Preface to IFRS Standards, the
Conceptual Framework for Financial Reporting and IFRS Standards.

Introduction
IN1 The objective of general purpose financial statements is to provide financial
information about a reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing
resources to the entity. The entity identifies the information necessary to
meet that objective by making appropriate materiality judgements.
IN2 The aim of this IFRS Practice Statement 2 Making Materiality

Judgements (Practice Statement) is to provide reporting entities with guidance
on making materiality judgements when preparing general purpose financial
statements in accordance with IFRS Standards. While some of the guidance in
this Practice Statement may be useful to entities applying the IFRS for
SMEs® Standard, the Practice Statement is not intended for those entities.
IN3 The need for materiality judgements is pervasive in the preparation of

financial statements. An entity makes materiality judgements when making
decisions about recognition and measurement as well as presentation and
disclosure. Requirements in IFRS Standards only need to be applied if their
effect is material to the complete set of financial statements.
IN4 This Practice Statement:
(a) provides an overview of the general characteristics of materiality.
(b) presents a four‑step process an entity may follow in making

materiality judgements when preparing its financial statements
(materiality process). The description of the materiality process
provides an overview of the role materiality plays in the preparation of
financial statements, with a focus on the factors the entity should
consider when making materiality judgements.
(c) provides guidance on how to make materiality judgements in specific

circumstances, namely, how to make materiality judgements about
prior‑period information, errors and covenants, and in the context of
interim reporting.
IN5 Whether information is material is a matter of judgement and depends on the

facts involved and the circumstances of a specific entity. This Practice
Statement illustrates the types of factors that the entity should consider when
judging whether information is material.
IN6 A Practice Statement is non‑mandatory guidance developed by the

International Accounting Standards Board. It is not a Standard. Therefore, its
application is not required to state compliance with IFRS Standards.
IN7 This Practice Statement includes examples illustrating how an entity might
apply some of the guidance in the Practice Statement based on the limited
facts presented. The analysis in each example is not intended to represent the
only manner in which the guidance could be applied.

IFRS Practice Statement 2

Objective
1 This IFRS Practice Statement 2 Making Materiality Judgements (Practice
Statement) provides reporting entities with non‑mandatory guidance on
making materiality judgements when preparing general purpose financial
statements in accordance with IFRS Standards.
2 The guidance may also help other parties involved in financial reporting to
understand how an entity makes materiality judgements when preparing such
financial statements.
Scope
3 The Practice Statement is applicable when preparing financial statements in
accordance with IFRS Standards. It is not intended for entities applying
the IFRS for SMEs® Standard.
4 The Practice Statement provides non‑mandatory guidance; therefore, its

application is not required to state compliance with IFRS Standards.
General characteristics of materiality
Definition of material
5 The Conceptual Framework for Financial Reporting (Conceptual Framework) provides
the following definition of material information (paragraph 7
of IAS 1 Presentation of Financial Statements provides a similar definition1):
Information is material if omitting, misstating or obscuring it could reasonably
be expected to influence decisions that the primary users of general purpose
financial reports make on the basis of those reports, which provide financial
information about a specific reporting entity. In other words, materiality is an
entity-specific aspect of relevance based on the nature or magnitude, or both, of
the items to which the information relates in the context of an individual
entity’s financial report.2
6 When making materiality judgements, an entity needs to take into account

how information could reasonably be expected to influence the primary users
of its financial statements—its primary users—when they make decisions3 on
the basis of those statements (see paragraphs 13–23).4
1 See paragraph 7 of IAS 1 Presentation of Financial Statements.

2 Paragraph 2.11 of the Conceptual Framework for Financial Reporting (Conceptual Framework).
3 Throughout this Practice Statement, the term ‘decisions’ refers to decisions about providing
resources to the entity, unless specifically indicated otherwise.
4 See paragraph 7 of IAS 1.

7 The objective of financial statements is to provide financial information about

a reporting entity that is useful to existing and potential investors, lenders
and other creditors in making decisions about providing resources to the
entity.5 The entity identifies the information necessary to meet that objective
by making appropriate materiality judgements.
Materiality judgements are pervasive

8 The need for materiality judgements is pervasive in the preparation of
financial statements. An entity makes materiality judgements when making
decisions about recognition, measurement, presentation and disclosure.
Requirements in IFRS Standards only need to be applied if their effect is
material to the complete set of financial statements,6 which includes the
primary financial statements7 and the notes. However, it is inappropriate for
the entity to make, or leave uncorrected, immaterial departures from IFRS
Standards to achieve a particular presentation of its financial position,
financial performance or cash flows.8
Recognition and measurement

9 IFRS Standards set out reporting requirements that the International
Accounting Standards Board (Board) has concluded will lead to financial
statements that provide information about the financial position, financial
performance and cash flows of an entity that is useful to the primary users of
those statements. The entity is only required to apply recognition and
measurement requirements when the effect of applying them is material.
Example A—materiality judgements on the application of accounting

policies
Background
An entity has a policy of capitalising expenditures on items of property,

plant and equipment (PP&E) in excess of a specified threshold and recognis-
ing any smaller amounts as an expense.
Application
IAS 16 Property, Plant and Equipment requires that the cost of an item of PP&E
is recognised as an asset when the criteria in paragraph 7 of IAS 16 are met.
continued...
5 See paragraph 1.2 of the Conceptual Framework.

6 In this Practice Statement the phrases ‘complete set of financial statements’ and ‘financial
statements as a whole’ are used interchangeably.
7 For the purposes of this Practice Statement, the primary financial statements comprise the
statement of financial position, statement(s) of financial performance, statement of changes in
equity and statement of cash flows.
8 See paragraph 8 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

...continued
The entity has assessed that its accounting policy—not capitalising expendi-
ture below a specific threshold—will not have a material effect on the
current‑period financial statements or on future financial statements,
because information reflecting the capitalisation and amortisation of such
expenditure could not reasonably be expected to influence decisions made
by the primary users of the entity’s financial statements.
Provided that such a policy does not have a material effect on the financial
statements and was not set to intentionally achieve a particular presentation
of the entity’s financial position, financial performance or cash flows, the
entity’s financial statements comply with IAS 16. Such a policy is neverthe-
less reassessed each reporting period to ensure that its effect on the entity’s
financial statements remains immaterial.
Presentation and disclosure

10 An entity need not provide a disclosure specified by an IFRS Standard if the
information resulting from that disclosure is not material. This is the case
even if the Standard contains a list of specific disclosure requirements or
describes them as ‘minimum requirements’. Conversely, the entity must
consider whether to provide information not specified by IFRS Standards if
that information is necessary for primary users to understand the impact of
particular transactions, other events and conditions on the entity’s financial
position, financial performance and cash flows.9
Example B—materiality judgements on disclosures specified by IFRS

Standards
Background
An entity presents property, plant and equipment (PP&E) as a separate line

item in its statement of financial position.
Application
IAS 16 Property, Plant and Equipment sets out specific disclosure requirements
for PP&E, including the disclosure of the amount of contractual commit-
ments for the acquisition of PP&E (paragraph 74(c) of IAS 16).
When preparing its financial statements, the entity assesses whether disclo-
sures specified in IAS 16 are material information. Even if PP&E is presented
as a separate line item in the statement of financial position, not all disclo-
sures specified in IAS 16 will automatically be required. In the absence of
any qualitative considerations (see paragraphs 46–51), if the amount of
contractual commitments for the acquisition of PP&E is not material, the
entity is not required to disclose this information.
9 See paragraphs 17(c) and 31 of IAS 1.

Example C—materiality judgements that lead to the disclosure of

information in addition to the specific disclosure requirements in IFRS
Standards
Background
An entity has its main operations in a country that, as part of an internation-

al agreement, is committed to introducing regulations to reduce the use of
carbon‑based energy. The regulations had not yet been enacted in the
national legislation of that country at the end of the reporting period.
The entity owns a coal‑fired power station in that country. During the
reporting period, the entity recorded an impairment loss on its coal‑fired
power station, reducing the carrying amount of the power station to its
recoverable amount. No goodwill or intangible assets with an indefinite
useful life were included in the cash‑generating unit.
Application
Paragraph 132 of IAS 36 Impairment of Assets does not require an entity to

disclose the assumptions used to determine the recoverable amount of a
tangible asset, unless goodwill or intangible assets with an indefinite useful
life are included in the carrying amount of the cash‑generating unit.
Nevertheless, the entity has concluded that the assumptions about the likeli-
hood of national enactment of regulations to reduce the use of carbon‑based
energy, as well as about the enactment plan, it considered in measuring the
recoverable amount of its coal‑fired power station could reasonably be
expected to influence decisions primary users make on the basis of the
entity’s financial statements. Hence, information about those assumptions is
necessary for primary users to understand the impact of the impairment on
the entity’s financial position, financial performance and cash flows.
Therefore, even though not specifically required by IAS 36, the entity
concludes that its assumptions about the likelihood of national enactment of
regulations to reduce the use of carbon‑based energy, as well as about the
enactment plan, constitute material information and discloses those
assumptions in its financial statements.
Judgement
11 When assessing whether information is material to the financial statements,
an entity applies judgement to decide whether the information could
reasonably be expected to influence decisions that primary users make on the
basis of those financial statements. When applying such judgement, the entity
considers both its specific circumstances and how the information provided in
the financial statements responds to the information needs of primary users.
12 Because an entity’s circumstances change over time, materiality judgements

are reassessed at each reporting date in the light of those changed
circumstances.

Primary users and their information needs

13 When making materiality judgements, an entity needs to consider the impact
information could reasonably be expected to have on the primary users of its
financial statements. Those primary users are existing and potential investors,
lenders and other creditors—those users who cannot require entities to
provide information directly to them and must rely on general purpose
financial statements for much of the financial information they need.10 In
addition to those primary users, other parties, such as the entity’s
management, regulators and members of the public, may be interested in
financial information about the entity and may find the financial statements
useful. However, the financial statements are not primarily directed at these
other parties.11
14 Because primary users include potential investors, lenders and other creditors,
it would be inappropriate for an entity to narrow the information provided in
its financial statements by focusing only on the information needs of existing
investors, lenders and other creditors.
Example D—existing and potential investors, lenders and other creditors

Background
An entity is 100 per cent owned by its parent. Its parent provides the entity
with semi‑finished products that the entity assembles and sells back to the
parent. The entity is entirely financed by its parent. The current users of the
entity’s financial statements include the parent and the entity’s creditors
(mainly local suppliers).
Application
The entity refers to the Conceptual Framework for Financial Reporting to identify
the primary users of its financial statements—existing and potential invest-
ors, lenders and other creditors who cannot require the entity to provide
information directly to them and must rely on general purpose financial
statements. When making materiality judgements in the preparation of its
financial statements, the entity does not reduce its disclosures to only those
of interest to its parent or its existing creditors. The entity also considers the
information needs of potential investors, lenders and other creditors when
making those judgements.
15 When making materiality judgements, an entity also considers that primary

users are expected to have a reasonable knowledge of business and economic
activities and to review and analyse the information included in the financial
statements diligently.12

11 See paragraphs 1.9 and 1.10 of the Conceptual Framework.

Decisions made by primary users

16 An entity needs to consider what type of decisions its primary users make on
the basis of the financial statements and, consequently, what information
they need to make those decisions.
17 The primary users of an entity’s financial statements make decisions about

providing resources to the entity. Those decisions involve: buying, selling or
holding equity and debt instruments, providing or settling loans and other
forms of credit, and exercising rights while holding investments (such as the
right to vote on or otherwise influence management’s actions that affect the
use of the entity’s economic resources).13 Such decisions depend on the
returns that primary users expect from an investment in those instruments.
18 The expectations existing and potential investors, lenders and other creditors
have about returns, in turn, depend on their assessment of the amount,
timing and uncertainty of the future net cash inflows to an entity,14 together
with their assessment of management’s stewardship of the entity’s resources.
19 Consequently, an entity’s primary users need information about:
(a) the resources of the entity (assets), claims against the entity (liabilities
and equity) and changes in those resources and claims (income and
expenses); and
(b) how efficiently and effectively the entity’s management and governing
board have discharged their responsibility to use the entity’s
resources.15
20 Financial information can make a difference in decisions if it has predictive

value, confirmatory value or both.16 When making materiality judgements, an
entity needs to assess whether information could reasonably be expected to
influence primary users’ decisions, rather than assessing whether that
information alone could reasonably be expected to change their decisions.
Meeting primary users’ information needs

21 The objective of financial statements is to provide primary users with financial
information that is useful to them in making decisions about providing
resources to an entity. However, general purpose financial statements do not,
and cannot, provide all the information that primary users need.17 Therefore,
the entity aims to meet the common information needs of its primary users. It
does not aim to address specialised information needs—information needs
that are unique to particular users.


Example E—primary users’ unique or individual information requests

Background
Twenty investors each hold 5 per cent of an entity’s voting rights. One of
these investors is particularly interested in information about the entity’s
expenditure in a specific location because that investor operates another
business in that location. Such information could not reasonably be expected
to influence decisions that other primary users make on the basis of the
entity’s financial statements.
Application
In making its materiality judgements, the entity does not need to consider
the specific information needs of that single investor. The entity concludes
that information about its expenditure in the specific location is immaterial
information for its primary users as a group and therefore decides not to
provide it in its financial statements.
22 To meet the common information needs of its primary users, an entity first
separately identifies the information needs that are shared by users within
one of the three categories of primary users defined in the Conceptual
Framework—for example investors (existing and potential)—then repeats the
assessment for the two remaining categories—namely lenders (existing and
potential) and other creditors (existing and potential). The total of the
information needs identified is the set of common information needs the
entity aims to meet.
23 In other words, the assessment of common information needs does not

require identifying information needs shared across all existing and potential
investors, lenders and other creditors. Some of the identified information
needs will be common to all three categories, but others may be specific to
only one or two of those categories. If an entity were to focus only on those
information needs that are common to all categories of primary users, it
might exclude information that meets the needs of only one category.
Impact of publicly available information

24 The primary users of financial statements generally consider information
from sources other than just the financial statements. For example, they
might also consider other sections of the annual report, information about the
industry an entity operates in, its competitors and the state of the economy,
the entity’s press releases as well as other documents the entity has published.
25 However, the financial statements are required to be a comprehensive

document that provides information about the financial position, financial
performance and cash flows of an entity that is useful to primary users in
making decisions about providing resources to the entity. Consequently, the
entity assesses whether information is material to the financial statements,
regardless of whether such information is also publicly available from another
source.

26 Moreover, public availability of information does not relieve an entity of the

obligation to provide material information in its financial statements.
Example F—impact of an entity’s press release on materiality

judgements
Background
An entity undertook a business combination in the reporting period. The

acquisition doubled the size of the entity’s operations in one of its main
markets. On the acquisition date, the entity issued a press release providing
an extensive explanation of the primary reasons for the business combina-
tion and a description of how it obtained control over the acquired business,
together with other information related to the acquisition.
Application
In preparing its financial statements, the entity first considered the disclo-
sure requirements in IFRS 3 Business Combinations. Paragraph B64(d) of IFRS 3
requires an entity to disclose, for each business combination that occurs
during the reporting period, ‘the primary reasons for the business combina-
tion and a description of how the acquirer obtained control of the acquiree’.
The entity concludes that information about the business combination is
material because the acquisition is expected to have a significant impact on
the entity’s operations, due to the overall size of the transaction compared
with the size of the entity. In these circumstances, even though information
relating to the primary reasons for the business combination and the
description of how it obtained control is already included in a public
statement, the entity needs to provide the information in its financial
statements.
Interaction with local laws and regulations

27 An entity’s financial statements must comply with the requirements in IFRS
Standards, including requirements related to materiality (materiality
requirements), for the entity to state its compliance with those Standards.
Hence, an entity that wishes to state compliance with IFRS Standards cannot
provide less information than the information required by the Standards, even
if local laws and regulations permit otherwise.
28 Nevertheless, local laws and regulations may specify requirements that affect
what information is provided in the financial statements. In such
circumstances, providing information to meet local legal or regulatory
requirements is permitted by IFRS Standards, even if that information is not
material according to the materiality requirements in the Standards. However,
such information must not obscure information that is material according to
IFRS Standards.18
18 See paragraph 30A of IAS 1 and paragraph BC30F of the Basis for Conclusions on IAS 1.

Example G—information that is immaterial according to IFRS Standards

required by local laws and regulations
Background
An entity is a food retailer operating in country ABC. In country ABC, invest-

ments in research and development (R&D) are generally limited across the
industry; nonetheless, the government requires all entities to disclose, in
their financial statements, the aggregate amount of R&D expenditure
incurred during the period.
In the current reporting period, the entity recognised a small amount of
expenditure on R&D activities as an expense. No R&D expenditure was
capitalised during the period.
When preparing its financial statements, the entity assessed the disclosure
of information about R&D expenditure incurred during the period as
immaterial, for IFRS purposes.
Application
To comply with local regulations, the entity discloses in its financial

statements information about R&D expenditure incurred during the period.
IFRS Standards permit the entity to disclose that information in its financial
statements, but the entity needs to organise its disclosures to ensure that
material information is not obscured.
Example H—information that is material according to IFRS Standards not

required by local laws and regulations
Background
An entity operates in a country where the government requires the disclo-

sure of the details of property, plant and equipment (PP&E) disposals, but
only if their carrying amounts exceed a specified percentage of total assets.
In the current reporting period, the entity disposed of PP&E below the
threshold specified in the local regulation. This transaction was with a
related party, which paid the entity less than the fair value of the item
disposed.
When preparing its financial statements, the entity applied judgement and
concluded that information about the details of the disposal was material,
mainly because of the terms of the transaction and the fact it was with a
related party.
Application
To comply with IFRS Standards, the entity discloses details of that disposal
even though local regulations require disclosure of PP&E disposals only if
their carrying amount exceeds a specified percentage of total assets.

Making materiality judgements
Overview of the materiality process

29 An entity may find it helpful to follow a systematic process in making
materiality judgements when preparing its financial statements. The four‑step
process described in the following paragraphs is an example of such a process.
This description provides an overview of the role materiality plays in the
preparation of financial statements, with a focus on the factors the entity
should consider when making materiality judgements. In this Practice
Statement, this four‑step process is called the ‘materiality process’.
30 The materiality process describes how an entity could assess whether

information is material for the purposes of presentation and disclosure, as
well as for recognition and measurement. The process illustrates one possible
way to make materiality judgements, but it incorporates the materiality
requirements an entity must apply to state compliance with IFRS Standards.
The materiality process considers potential omission and potential
misstatement of information, as well as unnecessary inclusion of immaterial
information and whether immaterial information obscures material
information. In all cases, the entity needs to focus on how the information
could reasonably be expected to influence decisions of the primary users of its
31 Judgement is involved in assessing materiality when preparing financial

statements. The materiality process is designed as a practice guide to help an
entity apply judgement in an efficient and effective way.
32 The materiality process is not intended to describe the assessment of

materiality for local legal and regulatory purposes. An entity refers to its local
requirements to assess whether it is compliant with local laws and
regulations.
A four‑step materiality process

33 The steps identified as a possible approach to the assessment of materiality in
the preparation of the financial statements are, in summary:
(a) Step 1—identify. Identify information that has the potential to be

material.
(b) Step 2—assess. Assess whether the information identified in Step 1 is,
in fact, material.
(c) Step 3—organise. Organise the information within the draft financial
statements in a way that communicates the information clearly and
concisely to primary users.
(d) Step 4—review. Review the draft financial statements to determine

whether all material information has been identified and materiality
considered from a wide perspective and in aggregate, on the basis of
the complete set of financial statements.

34 When preparing its financial statements, an entity may rely on materiality

assessments from prior periods, provided that it reconsiders them in the light
of any change in circumstances and of any new or updated information.
Diagram—the four-step materiality process
Step 1—identify
35 An entity identifies information about its transactions, other events and
conditions that primary users might need to understand to make decisions
about providing resources to the entity.
36 In identifying this information, an entity considers, as a starting point, the

requirements of the IFRS Standards applicable to its transactions, other events
and conditions. This is the starting point because, when developing a
Standard, the Board identifies the information it expects will meet the needs
of a broad range of primary users for a wide variety of entities in a range of
circumstances.19

37 When the Board develops a Standard, it also considers the balance between
the benefits of providing information and the costs of complying with the
requirements in that Standard. However, the cost of applying the
requirements in the Standards is not a factor for an entity to consider when
making materiality judgements—the entity should not consider the cost of
complying with requirements in IFRS Standards, unless there is explicit
permission in the Standards.
38 An entity also considers its primary users’ common information needs (as
explained in paragraphs 21–23) to identify any information—in addition to
that specified in IFRS Standards—necessary to enable primary users to
understand the impact of the entity’s transactions, other events and
conditions on the entity’s financial position, financial performance and cash
flows (see paragraph 10). Existing and potential investors, lenders and other
creditors need information about the resources of the entity (assets), claims
against the entity (liabilities and equity) and changes in those resources and
claims (income and expenses), and information that will help them assess how
efficiently and effectively the entity’s management and governing board have
discharged their responsibility to use the entity’s resources.20
39 The output of Step 1 is a set of potentially material information.
Step 2—assess
40 An entity assesses whether the potentially material information identified in
Step 1 is, in fact, material. In making this assessment, the entity needs to
consider whether its primary users could reasonably be expected to be
influenced by the information when making decisions about providing
resources to the entity on the basis of the financial statements. The entity
performs this assessment in the context of the financial statements as a
whole.
41 An entity might conclude that an item of information is material for various

reasons. Those reasons include the item’s nature or magnitude, or a
combination of both, judged in relation to the particular circumstances of the
entity.21 Therefore, making materiality judgements involves both quantitative
and qualitative considerations. It would not be appropriate for the entity to
rely on purely numerical guidelines or to apply a uniform quantitative
threshold for materiality (see paragraphs 53–55).
42 The following paragraphs describe some common ‘materiality factors’ that an

entity should use to help identify when an item of information is material.
These factors are organised into the following categories:
(a) quantitative; and
(b) qualitative—either entity‑specific or external.


43 The output of Step 2 is a preliminary set of material information. For

presentation and disclosure, this involves decisions about what information an
entity needs to provide in its financial statements, and in how much detail22
(including identifying appropriate levels of aggregation an entity provides in
the financial statements). For recognition and measurement, the output of
Step 2 involves the identification of information that, if not recognised or
otherwise misstated, could reasonably be expected to influence primary users’
decisions.
Quantitative factors
44 An entity ordinarily assesses whether information is quantitatively material
by considering the size of the impact of the transaction, other event or
condition against measures of the entity’s financial position, financial
performance and cash flows. The entity makes this assessment by considering
not only the size of the impact it recognises in its primary financial
statements but also any unrecognised items that could ultimately affect
primary users’ overall perception of the entity’s financial position, financial
performance and cash flows (eg contingent liabilities or contingent assets).
The entity needs to assess whether the impact is of such a size that
information about the transaction, other event or condition could reasonably
be expected to influence its primary users’ decisions about providing
resources to the entity.
45 Identifying the measures against which an entity makes this quantitative

assessment is a matter of judgement. That judgement depends on which
measures are of great interest to the primary users of the entity’s financial
statements. Examples include measures of the entity’s revenues, the entity’s
profitability, financial position ratios and cash flow measures.
Qualitative factors
46 For the purposes of this Practice Statement, qualitative factors are
characteristics of an entity’s transactions, other events or conditions, or of
their context, that, if present, make information more likely to influence the
decisions of the primary users of the entity’s financial statements. The mere
presence of a qualitative factor will not necessarily make the information
material, but is likely to increase primary users’ interest in that information.
47 In making materiality judgements, an entity considers both entity‑specific and

external qualitative factors. These factors are described separately in the
following paragraphs. However, in practice, the entity may need to consider
them together.
48 An entity‑specific qualitative factor is a characteristic of the entity’s

transaction, other event or condition. Examples of such factors include, but
are not limited to:
(a) involvement of a related party of the entity;

(b) uncommon, or non‑standard, features of a transaction or other event

or condition; or
(c) unexpected variation or unexpected changes in trends. In some

circumstances, the entity might consider a quantitatively immaterial
amount as material because of the unexpected variation compared to
the prior‑period amount provided in its financial statements.
49 The relevance of information to the primary users of an entity’s financial

statements can also be affected by the context in which the entity operates.
An external qualitative factor is a characteristic of the context in which the
entity’s transaction, other event or condition occur that, if present, makes
information more likely to influence the primary users’ decisions.
Characteristics of the entity’s context that might represent external
qualitative factors include, but are not limited to, the entity’s geographical
location, its industry sector, or the state of the economy or economies in
which the entity operates.
50 Due to the nature of external qualitative factors, entities operating in the

same context might share a number of external qualitative factors. Moreover,
external qualitative factors could remain constant over time or could vary.
51 In some circumstances, if an entity is not exposed to a risk to which other

entities in its industry are exposed, that fact could reasonably be expected to
influence its primary users’ decisions; that is, information about the lack of
exposure to that particular risk could be material information.
Interaction of qualitative and quantitative factors

52 An entity could identify an item of information as material on the basis of one
or more materiality factors. In general, the more factors that apply to a
particular item, or the more significant those factors are, the more likely it is
that the item is material.
53 Although there is no hierarchy among materiality factors, assessing an item of

information from a quantitative perspective first could be an efficient
approach to assessing materiality. If an entity identifies an item of
information as material solely on the basis of the size of the impact of the
transaction, other event or condition, the entity does not need to assess that
item of information further against other materiality factors. In these
circumstances, a quantitative threshold—a specified level, rate or amount of
one of the measures used in assessing size—can be a helpful tool in making a
materiality judgement. However, a quantitative assessment alone is not
always sufficient to conclude that an item of information is not material. The
entity should further assess the presence of qualitative factors.
54 The presence of a qualitative factor lowers the thresholds for the quantitative
assessment. The more significant the qualitative factors, the lower those
quantitative thresholds will be. However, in some cases an entity might decide
that, despite the presence of qualitative factors, an item of information is not
material because its effect on the financial statements is so small that it could
not reasonably be expected to influence primary users’ decisions.

55 In some other circumstances, an item of information could reasonably be

expected to influence primary users’ decisions regardless of its size—a
quantitative threshold could even reduce to zero. This might happen when
information about a transaction, other event or condition is highly scrutinised
by the primary users of an entity’s financial statements. Moreover, a
quantitative assessment is not always possible: non‑numeric information
might only be assessed from a qualitative perspective.
Example I—information about a related party transaction assessed as

material
Background
An entity has identified measures of its profitability as the measures of great

interest to the primary users of its financial statements. In the current
reporting period, the entity signed a five‑year contract with company ABC.
Company ABC will provide the entity with maintenance services for the
entity’s offices for an annual fee. Company ABC is controlled by a member of
the entity’s key management personnel. Hence, company ABC is a related
party of the entity.
Application
IAS 24 Related Party Disclosures requires an entity to disclose, for each related
party transaction that occurred during the period, the nature of the related
party relationship as well as information about the transaction and
outstanding balances, including commitments, necessary for users to
understand the potential effect of the relationship on the financial
statements.
When preparing its financial statements, the entity assessed whether
information about the transaction with company ABC was material.
The entity started its assessment from a quantitative perspective and
evaluated the impact of the related party transaction against measures of
the entity’s profitability. Having initially concluded that the impact of the
related party transaction was not material from a purely quantitative
perspective, the entity further assessed the presence of any qualitative
factors.
As the Board noted in developing IAS 24, related parties may enter into
transactions that unrelated parties would not enter into, and the transac-
tions may be priced at amounts that differ from the price for transactions
between unrelated parties.
The entity identified the fact that the maintenance agreement was conclu-
ded with a related party as a characteristic that makes information about
that transaction more likely to influence the decisions of its primary users.
continued...

...continued
The entity further assessed the transaction from a quantitative perspective

to determine whether the impact of the transaction could reasonably be
expected to influence primary users’ decisions when considered with the
fact that the transaction was with a related party (ie the presence of a
qualitative factor lowers the quantitative threshold). Having considered that
the transaction was with a related party, the entity concluded that the
impact was large enough to reasonably be expected to influence primary
users’ decisions. Hence, the entity assessed information about the transac-
tion with company ABC as material and disclosed that information in its
Example J—information about a related party transaction assessed as

immaterial
Background

interest to the primary users of its financial statements. The entity owns a
large fleet of vehicles. In the current reporting period, the entity sold an
almost fully depreciated vehicle to company DEF. The entity transferred the
vehicle for total consideration consistent with its market value and its
carrying amount. Company DEF is controlled by a member of the entity’s
key management personnel. Hence, company DEF is a related party of the
entity.
Application
When preparing its financial statements, the entity assessed whether

information about the transaction with company DEF was material.
As in Example I, the entity started its assessment from a quantitative
perspective and evaluated the impact of the related party transaction against
measures of the entity’s profitability. Having initially concluded that the
impact of the related party transaction was not material from a purely
quantitative perspective, the entity further assessed the presence of any
qualitative factors.
The entity transferred the vehicle for a total consideration consistent with
its market value and its carrying amount. However, the entity identified the
fact that the vehicle was sold to a related party as a characteristic that
makes information about that transaction more likely to influence the
decisions of its primary users.
The entity further assessed the transaction from a quantitative perspective
but concluded that its impact was too small to reasonably be expected to
influence primary users’ decisions, even when considered with the fact that
the transaction was with a related party. Information about the transaction
with company DEF was consequently assessed as immaterial and not
disclosed in the entity’s financial statements.

Example K—influence of external qualitative factors on materiality

judgements
Background
An international bank holds a very small amount of debt originating from a

country whose national economy is currently experiencing severe financial
difficulties. Other international banks that operate in the same sector as the
entity hold significant amounts of debt originating from that country and,
hence, are significantly affected by the financial difficulties in that country.
Application
Paragraph 31 of IFRS 7 Financial Instruments: Disclosures requires an entity to

disclose information that enables users of its financial statements to
evaluate the nature and extent of risk arising from financial instruments to
which the entity is exposed at the end of the reporting period.
When preparing its financial statements, the bank assessed whether the fact
that it holds a very small amount of debt originating from that country was
material information.
In making that assessment, the bank considered the exposure to that partic-
ular debt faced by other international banks operating in the same sector
(external qualitative factor).
In these circumstances, the fact that the bank is holding a very small
amount of debt (or even no debt at all) originating from that country, while
other international banks operating in the same sector have significant
holdings, provides the entity’s primary users with useful information about
how effective management has been at protecting the bank’s resources from
unfavourable effects of the economic conditions in that country.
The bank assessed the information about the lack of exposure to that partic-
ular debt as material and disclosed that information in its financial
statements.
Step 3—organise
56 Classifying, characterising and presenting information clearly and concisely
makes it understandable.23 An entity exercises judgement when deciding how
to communicate information clearly and concisely. For example, the entity is
more likely to clearly and concisely communicate the material information
identified in Step 2 by organising it to:
(a) emphasise material matters;
(b) tailor information to the entity’s own circumstances;
(c) describe the entity’s transactions, other events and conditions as

simply and directly as possible without omitting material information
and without unnecessarily increasing the length of the financial
statements;

(d) highlight relationships between different pieces of information;
(e) provide information in a format that is appropriate for its type,

eg tabular or narrative;
(f) provide information in a way that maximises, to the extent possible,

comparability among entities and across reporting periods;
(g) avoid or minimise duplication of information in different parts of the

financial statements; and
(h) ensure material information is not obscured by immaterial

information.
57 Financial statements are less understandable for primary users if information

is organised in an unclear manner. Similarly, financial statements are less
understandable if an entity aggregates material items that have different
natures or functions, or if material information is obscured,24 for example, by
an excessive amount of immaterial information.
58 Furthermore, an entity considers the different roles of primary financial

statements and notes in deciding whether to present an item of information
separately in the primary financial statements, to aggregate it with other
information or to disclose the information in the notes.
59 The output of Step 3 is the draft financial statements.
Step 4—review
60 An entity needs to assess whether information is material both individually
and in combination with other information25 in the context of its financial
statements as a whole. Even if information is judged not to be material on its
own, it might be material when considered in combination with other
information in the complete set of financial statements.
61 When reviewing its draft financial statements, an entity draws on its

knowledge and experience of its transactions, other events and conditions to
identify whether all material information has been provided in the financial
statements, and with appropriate prominence.
62 This review gives an entity the opportunity to ‘step back’ and consider the
information provided from a wider perspective and in aggregate. This enables
the entity to consider the overall picture of its financial position, financial
performance and cash flows. In performing this review, the entity also
considers whether:
(a) all relevant relationships between different items of information have

been identified. Identifying new relationships between information
might lead to that information being identified as material for the first
time.
24 See paragraph 30A of IAS 1.


(b) items of information that are individually immaterial, when

considered together, could nevertheless reasonably be expected to
influence primary users’ decisions.
(c) the information in the financial statements is communicated in an

effective and understandable way, and organised to avoid obscuring
material information.
(d) the financial statements provide a fair presentation of the entity’s

financial position, financial performance and cash flows.26
63 The review may lead to:
(a) additional information being provided in the financial statements;
(b) greater disaggregation of information that had already been identified

as material;
(c) information that had already been identified as immaterial being

removed from the financial statements to avoid obscuring material
information; or
(d) information being reorganised within the financial statements.
64 The review in Step 4 may also lead an entity to question the assessment
performed in Step 2 and decide to re‑perform that assessment. As a result of
re‑performing its assessment in Step 2, the entity might conclude that
information previously identified as material is, in fact, immaterial, and
remove it from the financial statements.
65 The output of Step 4 is the final financial statements.
Specific topics
Prior‑period information
66 An entity makes materiality judgements on the complete set of financial
statements, including prior‑period27 information provided in the financial
statements.
67 IFRS Standards require an entity to present information in respect of the

preceding period for all amounts reported in the current‑period financial
statements.28 Furthermore, the Standards require the entity to provide
prior‑period information for narrative and descriptive information if it is
relevant to understanding the current‑period financial statements.29 Finally,
the Standards require the entity to present, as a minimum, two statements of
financial position, two statements of profit or loss and other comprehensive
income, two statements of profit or loss (if presented separately), two

27 For this Practice Statement, ‘prior‑period’ should be read as ‘prior‑periods’ if financial statements
include amounts and disclosures for more than one prior period.
28 Except when IFRS Standards permit or require otherwise. See paragraph 38 of IAS 1.

statements of cash flows, two statements of changes in equity, and related

notes.30 These requirements are the minimum comparative information
identified by the Standards.31
68 Assessing whether prior‑period information is material to the current‑period

financial statements might lead an entity to:
(a) provide more prior‑period information than was provided in the

prior‑period financial statements (see paragraph 70); or
(b) provide less prior‑period information than was provided in the

prior‑period financial statements (see paragraph 71).
69 An entity also needs to consider any local laws or regulations, in respect of the
prior‑period information to be provided in financial statements, when making
decisions on what prior‑period information to provide in the current‑period
financial statements. Those local laws or regulations might require the entity
to provide in the financial statements prior‑period information in addition to
the minimum comparative information required by the Standards. The
Standards permit the inclusion of such additional information, but require
that it is prepared in accordance with the Standards32 and does not obscure
material information.33 However, an entity that wishes to state compliance
with IFRS Standards cannot provide less information than required by the
Standards, even if local laws and regulations permit otherwise.
Prior‑period information not previously provided

70 An entity must provide prior‑period information needed to understand the
current‑period financial statements,34 regardless of whether that information
was provided in the prior‑period financial statements—this requirement is not
conditional on whether the prior‑period information was provided in the
prior‑period financial statements. Consequently, the inclusion of prior‑period
information not previously included would be required if this is necessary for
the primary users to understand the current‑period financial statements.
30 See paragraph 38A of IAS 1.

31 Paragraph 10(f) of IAS 1 also requires an entity to provide a statement of financial position as at
the beginning of the preceding period when the entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its financial statements, or when
it reclassifies items in its financial statements in accordance with paragraphs 40A–40D of IAS 1.
32 See paragraph 38C of IAS 1.
33 See paragraph 30A of IAS 1 and paragraph BC30F of the Basis for Conclusions on IAS 1.

Example L—prior‑period information not previously provided

Background
In the prior period, an entity had a very small amount of debt outstanding.
Information about this debt was appropriately assessed as immaterial in the
prior period, and so the entity did not disclose any maturity analysis
showing the remaining contractual maturities or other information that
would otherwise be required by paragraph 39(a) of IFRS 7 Financial Instru-
ments: Disclosures.
In the current period, the entity issued a large amount of debt. The entity
concluded that information about debt maturity was material information
and disclosed it, in the form of a table, in the current‑period financial
statements.
Application
The entity might conclude that including a prior‑period debt maturity

analysis in the financial statements would be necessary for primary users to
understand the current‑period financial statements. In these circumstances,
a narrative description of the maturity of the prior‑period balances of the
outstanding debt might be sufficient.
Summarising prior‑period information

71 Except to the extent required to comply with any local laws or regulations
affecting the preparation of financial statements or their audit, an entity does
not automatically reproduce in the current‑period financial statements all the
information provided in the prior‑period financial statements. Instead, the
entity may summarise prior‑period information, retaining the information
necessary for primary users to understand the current‑period financial
statements.

Example M—summarising prior‑period information

Background
An entity disclosed, in the prior‑period financial statements, details of a

legal dispute which led to the recognition, in that period, of a provision. In
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets the
entity disclosed in the prior‑period financial statements a detailed descrip-
tion of uncertainties about the amount and timing of possible cash outflows,
in respect of the dispute, together with the major assumptions made
concerning future events.
Most of the uncertainties have been resolved in the current period, and, even
though the liability has not been settled, a court pronouncement confirmed
the amount already recognised in the financial statements by the entity.
The entity considered the relevant local laws, regulations and other report-
ing requirements and concluded that there were no locally prescribed
obligations relating to the inclusion of prior‑period information in the
current‑period financial statements.
Application
In these circumstances, on the basis of the requirements in IFRS Standards,

the entity may not need to reproduce in the current‑period financial
statements all of the information about the legal dispute provided in the
prior‑period financial statements. Because most of the uncertainties have
been resolved, users of the financial statements for the current period may
no longer need detailed information about those uncertainties. Instead,
information about those uncertainties might be summarised and updated to
reflect the current‑period events and circumstances and the resolution of
previously reported uncertainties.
Errors
72 Errors are omissions from and/or misstatements in an entity’s financial
statements arising from a failure to use, or misuse of, reliable information
that is available, or could reasonably be expected to be obtained.35 Material
errors are errors that individually or collectively could reasonably be expected
to influence decisions that primary users make on the basis of those financial
statements. Errors may affect narrative descriptions disclosed in the notes as
well as amounts reported in the primary financial statements or in the notes.
73 An entity must correct all material errors, as well as any immaterial errors
made intentionally to achieve a particular presentation of its financial
position, financial performance or cash flows, to ensure compliance with IFRS
Standards.36 The entity should refer to IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors for guidance on how to correct an error.
35 See paragraph 5 of IAS 8 (derived from the definition of prior‑period errors).


74 Immaterial errors, if not made intentionally to achieve a particular

presentation, do not need to be corrected to ensure compliance with IFRS
Standards. However, correcting all errors (including those that are not
material) in the preparation of the financial statements lowers the risk that
immaterial errors will accumulate over reporting periods and become
material.
75 An entity assesses whether an error is material by applying the same

considerations as outlined in the description of the materiality process.
Making materiality judgements about errors involves both quantitative and
qualitative considerations. The entity identifies information that, if misstated
or omitted, could reasonably be expected to influence primary users’ decisions
(as described in Step 1 and Step 2 of the materiality process). The entity also
considers whether any identified errors are material on a collective basis (as
described in Step 4 of the materiality process).
76 If an error is judged not to be material on its own, it might be regarded as

material when considered in combination with other information. However,
in general, if an error is individually assessed as material to an entity’s
financial statements, the existence of other errors that affect the entity’s
financial position, financial performance or cash flows in the opposite way,
does not make the error immaterial, nor does it eliminate the need to correct
the error.
Example N—individual and collective assessment of errors

Background

interest to the primary users of its financial statements. During the current
reporting period, the entity recognised:
(a) an expense accrual of CU100(a) that should not have been recognised.
The accrual affected the line item ‘cost of services’.
(b) the reversal of a provision of CU80 recognised in the previous period

that should not have been reversed. The reversal affected the line
item ‘other operating income (expense)’.
Application
In assessing whether these errors are material to its financial statements,

the entity did not identify the presence of any qualitative factors and thus
made its materiality judgement solely from a quantitative perspective. The
entity concluded that both errors were individually material because of their
impact on its profit.
continued...

...continued
In these circumstances, it would be inappropriate to consider the quantita-

tive effect of the errors on a net basis, ie as a CU20 overstatement of
expenses, thereby concluding that the identified errors do not need to be
corrected. If an error is individually assessed as material to the entity’s
financial statements, the existence of other errors that affect the entity’s
financial position, financial performance or cash flows in an opposite way,
does not eliminate the need to correct it, or make the error immaterial.
(a) In this example, currency amounts are denominated in ‘currency units’ (CU).
Cumulative errors
77 An entity may, over a number of reporting periods, accumulate errors that
were immaterial, both in individual prior periods and cumulatively over all
prior periods. Uncorrected errors that have accumulated over more than one
period are sometimes called ‘cumulative errors’.
78 Materiality judgements about cumulative errors in prior‑period financial

statements that an entity made at the time those statements were authorised
for issue need not be revisited in subsequent periods unless the entity failed to
use, or misused, information that:
(a) was available when financial statements for those periods were
authorised for issue; and
(b) could reasonably be expected to have been obtained and taken into
account in the preparation of those financial statements.37
79 To assess whether a cumulative error has become material to the

current‑period financial statements, an entity considers whether, in the
current period:
(a) the entity’s circumstances have changed, leading to a different

materiality assessment for the current period; or
(b) further accumulation of a current‑period error onto the cumulative

error has occurred.
80 An entity must correct cumulative errors if they have become material to the
current‑period financial statements.

Example O—current‑period assessment of cumulative errors

Background
An entity, three years ago, purchased a plant. The plant has a useful life of
50 years and a residual value amounting to 20 per cent of the plant cost. The
entity started to use the plant three years ago, but has not recognised any
depreciation for it (cumulative error). In each prior period, the entity
assessed the error of not depreciating its plant as being individually and
cumulatively immaterial to the financial statements for that period. There is
no indication that the materiality judgements of prior periods were wrong.
In the current period, the entity started depreciating the plant.
In the same period, the entity experienced a significant reduction in profita-
bility (the type of circumstance referred to in paragraph 79(a) of the Practice
Statement).
Application
When making its materiality judgements in the preparation of the current-

period financial statements, the entity concluded that the cumulative error
was material to the current-period financial statements.
In this scenario, the entity does not need to revisit the materiality assess-
ments it made in prior periods. However, because in the current period the
cumulative error has become material to the current-period financial
statements, the entity must apply the requirements in IAS 8 to correct it.
Information about covenants

81 An entity assesses the materiality of information about the existence and
terms of a loan agreement clause (covenant), or of a covenant breach, to
decide whether to provide information related to the covenant in the financial
statements. This assessment is made in the same way as for other
information, that is, by considering whether that information could
reasonably be expected to influence decisions that its primary users make on
the basis of the entity’s financial statements (see ‘A four-step materiality
process’, from paragraph 33).
82 In particular, when a covenant exists, an entity considers both:
(a) the consequences of a breach occurring, that is, the impact a covenant
breach would have on the entity’s financial position, financial
performance and cash flows. If those consequences would affect the
entity’s financial position, financial performance or cash flows in a
way that could reasonably be expected to influence primary users’
decisions, then the information about the existence of the covenant
and its terms is likely to be material. Conversely, if the consequences
of a covenant breach would not affect the entity’s financial position,
financial performance or cash flows in such a way, then disclosures
about the covenant might not be needed.

(b) the likelihood of a covenant breach occurring. The more likely it is

that a covenant breach would occur, the more likely it is that
information about the existence and terms of the covenant would be
material.
83 In assessing whether information about a covenant is material, a combination

of the considerations in paragraph 82(a)–82(b) applies. Information about a
covenant for which the consequences of a breach would affect an entity’s
financial position, financial performance or cash flows in a way that could
reasonably be expected to influence primary users’ decisions, but for which
there is only a remote likelihood of the breach occurring, is not material.
Example P—assessing whether information about covenants is material

Background
An entity has rapidly grown over the past five years and recently suffered
some liquidity problems. A long-term loan was granted to the entity in the
current reporting period. The loan agreement includes a clause that requires
the entity to maintain a ratio of debt to equity below a specified threshold,
to be measured at each reporting date (the covenant). According to the loan
agreement, the debt-to-equity ratio has to be calculated on the basis of debt
and equity figures as presented in the entity’s IFRS financial statements. If
the entity breaches the covenant, the entire loan becomes payable on
demand. The disclosure of covenant terms in an entity’s financial statements
is not required by any local laws or regulations.
Application
Paragraph 31 of IFRS 7 Financial Instruments: Disclosures requires an entity to

disclose information that enables users of its financial statements to
evaluate the nature and extent of risk arising from financial instruments to
which the entity is exposed at the end of the reporting period.
In the preparation of its financial statements, the entity assesses whether
information about the existence of the covenant and its terms is material
information, considering both the consequences and the likelihood of a
breach occurring.
In these circumstances, the entity concluded that, considering its recent
liquidity problem, any acceleration of the long-term loan repayment plan
(the consequence of the covenant breach occurring) would affect the entity’s
financial position and cash flows in a way that could reasonably be expected
to influence primary users’ decisions.
The entity also considered the likelihood of a breach occurring.
continued...

...continued
Scenario 1—the lender defined the covenant threshold on the basis of the
three-year business plan prepared by the entity, adding a 10 per cent
tolerance to the forecast figures
In this scenario, even though the entity has historically met its past business
plans, it assessed the likelihood of a breach occurring as higher than remote.
Therefore, information about the existence of the covenant and its terms
was assessed as material and disclosed in the entity’s financial statements.
Scenario 2—the lender defined the covenant threshold on the basis of the
three-year business plan prepared by the entity, adding a 200 per cent
tolerance to the forecast figures
In this scenario, the entity assessed the likelihood of a breach occurring as
remote, on the basis of its historical track record of meeting its past business
plans and the magnitude of the tolerance included in the covenant thresh-
old. Therefore, although the consequences of the covenant breach would
affect the entity’s financial position and cash flows in a way that could
reasonably be expected to influence primary users’ decisions, the entity
concluded that information about the existence of the covenant and its
terms was not material.
Materiality judgements for interim reporting

84 An entity makes materiality judgements in preparing both annual financial
statements and interim financial reports prepared in accordance with IAS 34
Interim Financial Reporting. In either case, the entity could apply the materiality
process described in paragraphs 29–65. For its interim financial report, the
entity considers the same materiality factors as in its annual assessment.
However, it takes into consideration that the time period and the purpose of
an interim financial report differ from those of the annual financial
statements.
85 In making materiality judgements on its interim financial report, an entity

focuses on the period covered by that report, that is:
(a) it assesses whether information in the interim financial report is

material in relation to the interim period financial data, not annual
data.38
(b) it applies the materiality factors on the basis of both the current
interim period data and also, whenever there is more than one interim
period (eg in the case of quarterly reporting), the data for the current
financial year to date.39
38 See paragraphs 23 and 25 of IAS 34 Interim Financial Reporting.

39 Paragraph 20 of IAS 34 requires an entity to include in the interim financial report the
statements of profit or loss and other comprehensive income for both periods, the current
interim period and the current financial year to date.

(c) it may consider whether to provide in the interim financial report

information that is expected to be material to the annual financial
statements. However, information that is expected to be material to
the annual financial statements need not be provided in the interim
financial report if it is not material to the interim financial report.
Example Q—information that is expected to be material to the annual

financial statements
Background
An entity sells mainly standardised products to private customers in its

home market. In the first half of the reporting period, 98 per cent of the
entity’s revenue was generated by sales of Product X. The remaining revenue
was principally derived from a pilot sale of a new product line—Product Y—
that the entity planned to launch in the third quarter of the year. The entity
expects revenue from Product Y to increase significantly by the end of the
annual reporting period, so that Product Y will provide approximately
20 per cent of the entity’s revenue for the full annual period.
Application
Paragraph 114 of IFRS 15 Revenue from Contracts with Customers requires an

entity to disaggregate revenue recognised from contracts into categories that
depict how the nature, amount, timing and uncertainty of revenue and cash
flows are affected by economic factors.
The entity did not identify any qualitative factors that made the amount of
revenues from Product Y material to the interim period.
In these circumstances, the entity concluded that the information about
disaggregation of revenue by product lines was not material to the interim
financial report and did not disclose it. In the preparation of the interim
financial report, the entity is not required to disaggregate its revenue by
product lines even if a greater level of disaggregation is expected to be
required for the subsequent annual financial statements. In other words,
although the entity expects that revenue by product lines will be material
information for the annual financial statements, that fact does not influence
the materiality assessment in the preparation of the entity’s interim
financial report.
86 Similarly, an entity may consider whether to provide information in the

annual financial statements that is only material to the interim financial
report. However, if information is material to the interim financial report, it
need not be presented or disclosed subsequently in the annual financial
statements if it is not material to those statements.

Example R—information that is only material to the interim financial

report
Background
An entity has identified measures of its profitability and cash flows as the
measures of great interest to the primary users of its financial statements.
During the interim period, the entity constructed a new chemical handling
process to enable it to comply with environmental requirements for the
production and storage of dangerous chemicals. Such an item of property,
plant and equipment (PP&E) qualifies for recognition as an asset in accord-
ance with paragraph 11 of IAS 16 Property, Plant and Equipment.
Application
Paragraph 74(b) of IAS 16 requires the disclosure of the expenditure

recognised in the carrying amount of an item of PP&E in the course of its
construction.
In the preparation of the interim financial report, the entity assessed, both
from a quantitative and qualitative perspective, the information about
expenditure recognised in the carrying amount of the chemical handling
process, concluded that information was material to the interim financial
report and disclosed it.
The entity incurred no further expenditure related to the chemical handling
process in the second half of the annual reporting period. In the preparation
of its annual financial statements, the entity assessed the expenditure
recognised in the carrying amount of the chemical handling process against
its annual profitability and cash flow measures and concluded that this
information was not material to the annual financial statements. In
reaching that conclusion, the entity did not identify any qualitative factors
leading to a different assessment.
The entity is not required to disclose information about the expenditure
recognised in the carrying amount of its chemical handling process in its
annual financial statements.
87 In assessing materiality, an entity also considers the purpose of interim

financial reports, which differs from the purpose of annual financial
statements. An interim financial report is intended to provide an update on
the latest complete set of annual financial statements.40 Information that is
material to the interim period, but was already provided in the latest annual
financial statements, does not need to be reproduced in the interim financial
report, unless something new occurs or an update is needed.41

41 See paragraphs 15–15A of IAS 34.

Interim reporting estimates

88 When an entity concludes that information about estimation uncertainty is
material, the entity needs to disclose that information. Measurements
included in interim financial reports often rely more on estimates than
measurements included in the annual financial statements.42 That fact does
not, in itself, make the estimated measurements material. Nevertheless,
relying on estimates for interim financial data to a greater extent than for
annual financial data might result in more disclosures about such
uncertainties being material, and thus being provided in the interim financial
report, compared with the annual financial statements.
Application date
89 This Practice Statement does not change any requirements in IFRS Standards
or introduce any new requirements. An entity that chooses to apply the
guidance in the Practice Statement is permitted to apply it to financial
statements prepared from 14 September 2017.

Appendix
References to the Conceptual Framework for Financial
Reporting and IFRS Standards
Extracts from the Conceptual Framework for Financial Reporting

Paragraph 1.2
Referred to in paragraphs 7 and 17 of the Practice Statement
The objective of general purpose financial reporting is to provide financial information

about the reporting entity that is useful to existing and potential investors, lenders and
other creditors in making decisions relating to providing resources to the entity. Those
decisions involve decisions about:
(a) buying, selling or holding equity and debt instruments;
(b) providing or settling loans and other forms of credit; or
(c) exercising rights to vote on, or otherwise influence, management’s actions that
affect the use of the entity’s economic resources.
Paragraph 1.3
Referred to in paragraph 18 of the Practice Statement
The decisions described in paragraph 1.2 depend on the returns that existing and
potential investors, lenders and other creditors expect, for example, dividends, principal
and interest payments or market price increases. Investors’, lenders’ and other creditors’
expectations about returns depend on their assessment of the amount, timing and
uncertainty of (the prospects for) future net cash inflows to the entity and on their
assessment of management’s stewardship of the entity’s economic resources. Existing
and potential investors, lenders and other creditors need information to help them make
those assessments.
Paragraph 1.4
To make the assessments described in paragraph 1.3, existing and potential investors,
lenders and other creditors need information about:
(a) the economic resources of the entity, claims against the entity and changes in
those resources and claims (see paragraphs 1.12–1.21); and
(b) how efficiently and effectively the entity’s management and governing board
have discharged their responsibilities to use the entity’s economic resources (see
paragraphs 1.22–1.23).
Paragraph 1.5

Many existing and potential investors, lenders and other creditors cannot require
reporting entities to provide information directly to them and must rely on general
purpose financial reports for much of the financial information they need. Consequently,
they are the primary users to whom general purpose financial reports are directed.
Paragraph 1.6
However, general purpose financial reports do not and cannot provide all of the
information that existing and potential investors, lenders and other creditors need. Those
users need to consider pertinent information from other sources, for example, general
economic conditions and expectations, political events and political climate, and industry
and company outlooks.
Paragraph 1.8
Individual primary users have different, and possibly conflicting, information needs and
desires. The Board, in developing Standards, will seek to provide the information set that
will meet the needs of the maximum number of primary users. However, focusing on
common information needs does not prevent the reporting entity from including
additional information that is most useful to a particular subset of primary users.
Paragraph 1.9
The management of a reporting entity is also interested in financial information about

the entity. However, management need not rely on general purpose financial reports
because it is able to obtain the financial information it needs internally.
Paragraph 1.10
Other parties, such as regulators and members of the public other than investors, lenders
and other creditors, may also find general purpose financial reports useful. However,
those reports are not primarily directed to these other groups.
Paragraph 2.7
Financial information is capable of making a difference in decisions if it has predictive

value, confirmatory value or both.
Paragraph 2.11
Information is material if omitting, misstating or obscuring it could reasonably be

expected to influence decisions that the primary users of general purpose financial
reports (see paragraph 1.5) make on the basis of those reports, which provide financial
information about a specific reporting entity. In other words, materiality is an entity-
specific aspect of relevance based on the nature or magnitude, or both, of the items to
which the information relates in the context of an individual entity’s financial report.

Consequently, the Board cannot specify a uniform quantitative threshold for materiality
or predetermine what could be material in a particular situation.
Paragraph 2.34
Classifying, characterising and presenting information clearly and concisely makes it

understandable.
Paragraph 2.36
Financial reports are prepared for users who have a reasonable knowledge of business
and economic activities and who review and analyse the information diligently. At times,
even well-informed and diligent users may need to seek the aid of an adviser to
understand information about complex economic phenomena.

Extracts from IAS 1 Presentation of Financial Statements

Paragraph 7
Referred to in paragraphs 5, 41 and 60 of the Practice Statement

Material:
Information is material if omitting, misstating or obscuring it could reasonably be

expected to influence decisions that the primary users of general purpose financial
statements make on the basis of those financial statements which provide financial
information about a specific reporting entity.
Materiality depends on the nature or magnitude of information, or both. An entity assesses

whether information, either individually or in combination with other information, is
material in the context of its financial statements taken as a whole.
Paragraph 7

Assessing whether information could reasonably be expected to influence decisions made by
the primary users of a specific reporting entity’s general purpose financial statements
requires an entity to consider the characteristics of those users while also considering the
entity’s own circumstances. […] At times, even well informed and diligent users may need to
seek the aid of an adviser to understand information about complex economic phenomena.
Paragraph 15

Financial statements shall present fairly the financial position, financial performance
and cash flows of an entity. Fair presentation requires the faithful representation of the
effects of transactions, other events and conditions in accordance with the definitions
and recognition criteria for assets, liabilities, income and expenses set out in
the Conceptual Framework for Financial Reporting (Conceptual Framework). The application of
IFRSs, with additional disclosure when necessary, is presumed to result in financial
statements that achieve a fair presentation.
Paragraph 17

In virtually all circumstances, an entity achieves a fair presentation by compliance with
applicable IFRSs. A fair presentation also requires an entity:
(a) to select and apply accounting policies in accordance with IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors. IAS 8 sets out a hierarchy of authoritative
guidance that management considers in the absence of an IFRS that specifically
applies to an item.
(b) to present information, including accounting policies, in a manner that provides

relevant, reliable, comparable and understandable information.
(c) to provide additional disclosures when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the entity’s financial position and
financial performance.

Paragraph 29

An entity shall present separately each material class of similar items. An entity shall
present separately items of a dissimilar nature or function unless they are immaterial.
Paragraph 30A
Referred to in paragraphs 28, 57 and 69 of the Practice Statement

When applying this and other IFRSs an entity shall decide, taking into consideration all
relevant facts and circumstances, how it aggregates information in the financial statements,
which include the notes. An entity shall not reduce the understandability of its financial
statements by obscuring material information with immaterial information or by
aggregating material items that have different natures or functions.
Paragraph 31

Some IFRSs specify information that is required to be included in the financial statements,
which include the notes. An entity need not provide a specific disclosure required by an IFRS
if the information resulting from that disclosure is not material. This is the case even if the
IFRS contains a list of specific requirements or describes them as minimum requirements.
An entity shall also consider whether to provide additional disclosures when compliance
with the specific requirements in IFRS is insufficient to enable users of financial statements
to understand the impact of particular transactions, other events and conditions on the
entity’s financial position and financial performance.
Paragraph 38

Except when IFRSs permit or require otherwise, an entity shall present comparative
information in respect of the preceding period for all amounts reported in the current
period’s financial statements. An entity shall include comparative information for
narrative and descriptive information if it is relevant to understanding the current
period’s financial statements.
Paragraph 38A

An entity shall present, as a minimum, two statements of financial position, two
statements of profit or loss and other comprehensive income, two separate statements of
profit or loss (if presented), two statements of cash flows and two statements of changes
in equity, and related notes.
Paragraph 38C

An entity may present comparative information in addition to the minimum comparative
financial statements required by IFRSs, as long as that information is prepared in accordance
with IFRSs. This comparative information may consist of one or more statements referred to
in paragraph 10, but need not comprise a complete set of financial statements. When this is
the case, the entity shall present related note information for those additional statements.

Paragraph BC30F of the Basis for Conclusions

Paragraph 30A was added to IAS 1 to highlight that when an entity decides how it aggregates
information in the financial statements, it should take into consideration all relevant facts
and circumstances. Paragraph 30A emphasises that an entity should not reduce the
understandability of its financial statements by providing immaterial information that
obscures the material information in financial statements or by aggregating material items
that have different natures or functions. Obscuring material information with immaterial
information in financial statements makes the material information less visible and
therefore makes the financial statements less understandable. The amendments do not
actually prohibit entities from disclosing immaterial information, because the Board thinks
that such a requirement would not be operational; however, the amendments emphasise
that disclosure should not result in material information being obscured.

Extracts from IAS 8 Accounting Policies, Changes in Accounting

Estimates and Errors
Paragraph 5

Prior period errors are omissions from, and misstatements in, the entity's financial
statements for one or more prior periods arising from a failure to use, or misuse of,
reliable information that:
(a) was available when financial statements for those periods were authorised for
issue; and
(b) could reasonably be expected to have been obtained and taken into account in
the preparation and presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying

accounting policies, oversights or misinterpretations of facts, and fraud.
Paragraph 8

IFRSs set out accounting policies that the IASB 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. However, it is inappropriate to make, or leave uncorrected,
immaterial departures from IFRSs to achieve a particular presentation of an entity’s financial
position, financial performance or cash flows.
Paragraph 41

Errors can arise in respect of the recognition, measurement, presentation or disclosure of
elements of financial statements. Financial statements do not comply with IFRSs if they
contain either material errors or immaterial errors made intentionally to achieve a
particular presentation of an entity's financial position, financial performance or cash flows.
Potential current period errors discovered in that period are corrected before the financial
statements are authorised for issue. However, material errors are sometimes not discovered
until a subsequent period, and these prior period errors are corrected in the comparative
information presented in the financial statements for that subsequent period (see paragraphs
42–47).

Extracts from IAS 34 Interim Financial Reporting

Paragraph 6

In the interest of timeliness and cost considerations and to avoid repetition of information
previously reported, an entity may be required to or may elect to provide less information at
interim dates as compared with its annual financial statements. This Standard defines the
minimum content of an interim financial report as including condensed financial statements
and selected explanatory notes. The interim financial report is intended to provide an update
on the latest complete set of annual financial statements. Accordingly, it focuses on new
activities, events, and circumstances and does not duplicate information previously reported.
Paragraph 15

An entity shall include in its interim financial report an explanation of events and
transactions that are significant to an understanding of the changes in financial position and
performance of the entity since the end of the last annual reporting period. Information
disclosed in relation to those events and transactions shall update the relevant information
presented in the most recent annual financial report.
Paragraph 15A

A user of an entity’s interim financial report will have access to the most recent annual
financial report of that entity. Therefore, it is unnecessary for the notes to an interim
financial report to provide relatively insignificant updates to the information that was
reported in the notes in the most recent annual financial report.
Paragraph 20

Interim reports shall include interim financial statements (condensed or complete) for
periods as follows:
(a) statement of financial position as of the end of the current interim period and a
comparative statement of financial position as of the end of the immediately
preceding financial year.
(b) statements of profit or loss and other comprehensive income for the current
interim period and cumulatively for the current financial year to date, with
comparative statements of profit or loss and other comprehensive income for the
comparable interim periods (current and year‑to‑date) of the immediately
preceding financial year. As permitted by IAS 1 (as amended in 2011), an interim
report may present for each period a statement or statements of profit or loss
and other comprehensive income.
(c) statement of changes in equity cumulatively for the current financial year to
date, with a comparative statement for the comparable year‑to‑date period of the
immediately preceding financial year.
(d) statement of cash flows cumulatively for the current financial year to date, with a
comparative statement for the comparable year‑to‑date period of the
immediately preceding financial year.

Paragraph 23

In deciding how to recognise, measure, classify, or disclose an item for interim financial
reporting purposes, materiality shall be assessed in relation to the interim period
financial data. In making assessments of materiality, it shall be recognised that interim
measurements may rely on estimates to a greater extent than measurements of annual
financial data.
Paragraph 25

While judgement is always required in assessing materiality, this Standard bases the
recognition and disclosure decision on data for the interim period by itself for reasons of
understandability of the interim figures. Thus, for example, unusual items, changes in
accounting policies or estimates, and errors are recognised and disclosed on the basis of
materiality in relation to interim period data to avoid misleading inferences that might
result from non‑disclosure. The overriding goal is to ensure that an interim financial report
includes all information that is relevant to understanding an entity’s financial position and
performance during the interim period.
Paragraph 41

The measurement procedures to be followed in an interim financial report shall be
designed to ensure that the resulting information is reliable and that all material
financial information that is relevant to an understanding of the financial position or
performance of the entity is appropriately disclosed. While measurements in both annual
and interim financial reports are often based on reasonable estimates, the preparation of
interim financial reports generally will require a greater use of estimation methods than
annual financial reports.

Approval by the Board of the IFRS Practice Statement 2 Making

Materiality Judgements issued in September 2017
The IFRS Practice Statement 2 Making Materiality Judgements was approved for issue by 12
of 12 members of the International Accounting Standards Board.43
Hans Hoogervorst Chairman

Suzanne Lloyd Vice‑Chair
Stephen Cooper
Martin Edelmann
Françoise Flores
Amaro Luiz De Oliveira Gomes
Gary Kabureck
Takatsugu Ochi
Darrel Scott
Thomas Scott
Chungwoo Suh
Mary Tokar
43 Stephen Cooper was a member of the Board when the IFRS Practice Statement 2 Making
Materiality Judgements was balloted.

Making Materiality Judgements: IFRS Practice Statement 2

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Making Materiality Judgements

IFRS Practice Statement 2

Making Materiality Judgements

© IFRS Foundation B847

IFRS PRACTICE STATEMENT 2 MAKING MATERIALITY

FOR THE BASIS FOR CONCLUSIONS, SEE PART C OF THIS EDITION

BASIS FOR CONCLUSIONS

B848 © IFRS Foundation

© IFRS Foundation B849

IN2 The aim of this IFRS Practice Statement 2 Making Materiality

IN3 The need for materiality judgements is pervasive in the preparation of

IN4 This Practice Statement:

(a) provides an overview of the general characteristics of materiality.

(b) presents a four‑step process an entity may follow in making

(c) provides guidance on how to make materiality judgements in specific

IN5 Whether information is material is a matter of judgement and depends on the

IN6 A Practice Statement is non‑mandatory guidance developed by the

B850 © IFRS Foundation

IFRS Practice Statement 2

4 The Practice Statement provides non‑mandatory guidance; therefore, its

General characteristics of materiality

6 When making materiality judgements, an entity needs to take into account

1 See paragraph 7 of IAS 1 Presentation of Financial Statements.

© IFRS Foundation B851

7 The objective of financial statements is to provide financial information about

Materiality judgements are pervasive

Recognition and measurement

Example A—materiality judgements on the application of accounting

An entity has a policy of capitalising expenditures on items of property,

5 See paragraph 1.2 of the Conceptual Framework.

B852 © IFRS Foundation

Presentation and disclosure

Example B—materiality judgements on disclosures specified by IFRS

An entity presents property, plant and equipment (PP&E) as a separate line

9 See paragraphs 17(c) and 31 of IAS 1.

© IFRS Foundation B853

Example C—materiality judgements that lead to the disclosure of

An entity has its main operations in a country that, as part of an internation-

Paragraph 132 of IAS 36 Impairment of Assets does not require an entity to

12 Because an entity’s circumstances change over time, materiality judgements

B854 © IFRS Foundation

Primary users and their information needs

Example D—existing and potential investors, lenders and other creditors

15 When making materiality judgements, an entity also considers that primary

10 See paragraph 1.5 of the Conceptual Framework.

© IFRS Foundation B855

Decisions made by primary users

17 The primary users of an entity’s financial statements make decisions about

19 Consequently, an entity’s primary users need information about:

20 Financial information can make a difference in decisions if it has predictive

Meeting primary users’ information needs

13 See paragraph 1.2 of the Conceptual Framework.

B856 © IFRS Foundation

Example E—primary users’ unique or individual information requests

23 In other words, the assessment of common information needs does not

Impact of publicly available information

25 However, the financial statements are required to be a comprehensive