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A Vision for the Future of Corporate Reporting (Part 3): Decision Making and Materiality

on 03 November 2020

The UK’s Financial Reporting Council (FRC) has published a thought-leadership piece, A Matter of Principles: The Future of Corporate Reporting.[1] Does it portray the future of corporate reporting as you see it? Comments are due by February 5, 2021.

I have been trying to stir up the community to talk about materiality, primarily related to XBRL/Inline XBRL, but also related to other non-financial areas, such as Sustainability.

The executive summary for the FRC paper summarizes the discussion on materiality in this way:

“Materiality is essentially a filter for determining what information is included in a particular report. The general principle for materiality that we propose in the model is that materiality will be judged by reference to the communication objective of the specific report. We do not believe that a single definition of materiality is appropriate for all reports.”

In the call for comments, they ask:

“We are proposing that there should no longer be a single test for materiality that is based on accounting standards but instead materiality will be dependent on the objective of a report. Do you agree with this approach, please explain why?”

I am very pleased that the topic of materiality is of such importance to the paper. In fact, materiality is the 14thmost common word in the document. (“Reporting,” “corporate,” “report,” “information” and “network,” along with “that,” are the most frequently used words.)

I hope to spend more time on this topic; meanwhile, some immediate questions:

  • Is materiality driven by the reporter’s objective, the stakeholder’s decision-making requirements, or both?
  • While materiality in the financial reporting marketplace is commonplace, if not totally agreed-upon and understood, is materiality currently limited to accounting standards by its nature? Couldn’t any reporting framework define the bounds of materiality for that framework? ISA 320.2 and .3 are focused on financial reporting, but seem easily applicable to any reporting framework: will a material misstatement influence the economic decisions of users taken on the basis of the reports?

[1] https://www.frc.org.uk/getattachment/cf85af97-4bd2-4780-a1ec-dc03b6b91fbf/Future-of-Corporate-Reporting-FINAL.pdf.

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