The Financial Accounting Standards Board (FASB) is seeking input on a recently released an exposure draft of proposed changes to chapter 3 of the Conceptual Framework for Financial Reporting. The proposed changes effect the concept of materiality.
There are a number of changes, but the most significant is that the board acknowledges that in the United States materiality is a legal concept. In the exposure draft, the board removes this statement:
Information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of 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.
and replaces it with this statement:
Materiality is a legal concept. In the United States, a legal concept may be established or changed through legislative, executive, or judicial action. The Board observes but does not promulgate definitions of materiality. Currently, the Board observes that the U.S. Supreme Court’s definition of materiality, in the context of the antifraud provisions of the U.S. securities laws, generally states that information is material if there is a substantial likelihood that the omitted or misstated item would have been viewed by a reasonable resource provider as having significantly altered the total mix of information.1 Consequently, the Board cannot specify or advise specifying a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation.
The board notes that materiality is an entity specific consideration. Therefore, the board does not consider materiality when issuing guidance.
The board is taking this action because it became aware that there was a difference between the definition of materiality set forth in previous standards and the legal definition of materiality as used in recent cases, causing potential for uncertainty. The board did note that the new definition is different from the definition of materiality published by IASB.