Exposure Draft and Comment Letters


The following analysis will seek to analyze the exposure draft and comment letters by the IFRS on the definition of Materiality seeking an amendment to the IAS 1 and IAS 8, Definition to Material (Amendments to IAS 1 and IAS 8) . The comments letters are drawn from Deloitte, EFRAG, ESMA, and KPMG will be used to identify any similarities, difference, support or opposition to the proposed amendments.

Issues in the Exposure Draft and Comments Letters

The exposure draft by the International Accounting Standards Board aimed at making minor changes to the IAS 1 on the Presentation of the Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to offer clarity on the definition of “material.” The proposed amendments aimed at improving the overall understanding about the existing requirements in terms of making materiality judgements. The proposal aimed at providing a consensus in the definition of the term, “Material” in IAS 1 and IAS 8. Any changes to the definition on these standards will be a result of the exposure draft. The comment letters by respondents aim to airing their perspectives in the proposed amendments. The comment letters thereby provide commendation on the proposed changes, indicates any shortcomings, and offers recommendation on how the amendments can be further improved. 

Description of Comments Letters

The European Financial Reporting Advisory Group (EFRAG) indicates support for the initiative by the IASB to eliminate the existing inconsistencies in the definition of materiality. EFRG also is in favor of replacing the threshold “could influence” with “could be reasonably expected to influence”. The reason indicated for this is that, it could be very essential in putting emphasize that materiality decisions need judgement and offer clarity on the nature of judgment to be made ins carrying out an inquiry in material is material. This is one of the areas where the comment letters unanimously agree upon. 

EFRAG is also of the idea that the removal of term, “omitting, misstating, and obscuring’ would have made the definition more simple and direct. ESMA hold the same views that these terms would need to be further clarified. All comment letters reviewed supported the need amending the definition terming it as a process that was long overdue. 

Copies of Comment Letters

Fig 1. (KPMG, 2018)

Fig 2. (EFRAG, 2018)

Fig 3: (European Securities and Markets Authority, 2017)

Fig 4: (Deloitte, 2017)

Interpretation of Comment Letters

The comment Letter from KPMG can be interpreted as being in support of the proposed amendments. This can be seen from the manner in which the comments are given. KPMG acknowledges the importance of ‘materiality’ in the preparation of financial statements and in the process of audit as it applies to the recognition, measurement, presentation, and disclosures. This indicates that KPMG fully understands the implications that the term materiality has in financial accounting to the preparers and auditors. 

In the comments, KPMG indicates explicit support to the proposed changes in the IFRS standard. The comments indicate the specific area that KPMG feels relevant in reference to the term materiality. These include; description of the threshold to “could reasonably be expected to influence”. KPMG indicate that is crucial as it highlights the importance of judgment when making materiality decisions. Another support is expressed in reference to the term “primary users” as it indicates that this offers clarifications on the specific user target by the entities thereby pointing to the need of being aware of how to address their needs. KPMG support can further be seen by how they indicate the practical challenging making of the materiality judgement in reference to the presentation and disclosure in the financial statements. In this sense, KPMG indicates that providing the clarity to the term ‘materiality’ will go a great way in facilitating better communication in financial statements by focusing on the material that it more relevant with less on irrelevant material.

Theoretical Perspective of the Comment Letters

The comment letter may be reviewed in reference to the three theories of regulation; public interest theory, capture theory, and private interest theory. The public interest theory indicates that regulation is carried out with an aim of offering protection and benefits to the public at large. Capture theory indicates point to the process in which the regulatory agencies ends up being controlled by the same industries players that they were meant to regulate. The private interest theory indicates that tendency of the those in regulatory agencies within the government being led by the same motivation like the private sector where wealth, fame and power is a key motivator. The comment letters best be explained using the public-interest theory.

It is clear that from the comments letters that the respondents are geared toward to ensuring the term materiality is defined as clear as possible. The respondent reviewed are stakeholders in the financial accounting sector and understands the implication of financial information the users. Materiality is a key characteristic of financial information that affects the success or failure of organization. The public interest theory indicates that regulation is carried out with motivation of societal interest to improve some outcomes. The comment letter indicates their support to a process that aimed at ending a practical challenge experienced by preparers and users of financial information due to the differences inn the definition of the term materiality. 

Underlying Assumptions

The underlying assumption of the public interest theory of regulation is that the regulators are assumed to act in the interest of the public and will only introduce a set of regulation if it is expected to benefit the public. The benefits in this case should outweigh the costs. It notes that regulations should not be introduced to offer support to any vested interests. It is assumed that regulators are not propelled by their own self-interest (Hantke, 2003). In the case, the issues that the IASB identifies in exposure draft in need of having a consistent definition under IAS1 and IAS 8 on materiality is expected to benefit the public. This will go a long way in settling the challenge of the preparers and users having different expectations in terms of materiality. The challenges arise when different users referring to same set of financial information fail to reach an agreement on materiality of an item but all are using the prescribed standard. With the proposed regulation the general public will benefit due to the end of the confusion. 


Deloitte. (2017). Exposure Draft ED/2017/2 Definition of Material . Retrieved from http://eifrs.ifrs.org/eifrs/comment_letters//397/397_22146_VeronicaPooleDeloitte_0_DTTLCommentLetterEDDefinitionofMaterial.pdf

EFRAG. (2018). ED/2017/6 Definition of Material- Proposed Amendments to IAS 1 and IAS 8. Retrieved from http://eifrs.ifrs.org/eifrs/comment_letters//397/397_22337_hocineKebliEuropeanFinancialReportingAdvisoryGroupEFRAG_0_EFRAGFinalCommentLetteronEDDefinitionofMaterialSigned.pdf

European Securities and Markets Authority. (2017). IASB;s Exposure Draft Definition of Materail- Proposed Amendments to IAS 1 and IAS 8. Retrieved from http://eifrs.ifrs.org/eifrs/comment_letters//397/397_22200_StevenMaijoorEuropeanSecuritiesandMarketsAuthorityESMA_0_ESMA3261222AmendmentsIAS8IAS1.pdf

Hantke, M. (2003). The Public Interest Theory of Regualtion:Non-Existence or Misinterpretation>. European Journal of Law and Economics, 165-194.

KPMG. (2018). Comment Letter on Exposure Draft ED/2017/6. Retrieved from http://eifrs.ifrs.org/eifrs/comment_letters//397/397_22309_AshaLeerKPMG_0_KPMGcommentletterExposureDraftED20176DefinitionofMaterialProposedamendmentstoIAS1IAS8.pdf

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