The preparation of financial statements is a crucial aspect of financial reporting, offering stakeholders a clear narrative of an entity’s financial health and performance. Central to this process is the disclosure of accounting policies, which provides context to the figures presented. Significant changes were made to the International Accounting Standard IAS 1, which now requires entities to disclose “material accounting policy information” instead of “significant accounting policies.” This change, effective for annual reporting periods beginning on or after 1 January 2023, marks a pivotal shift in how accounting policies are communicated in financial statements. We have however noticed, that preparers of financial statements are still hesitant to update the accounting policies to effect this change and rather still disclose the previous year accounting policies and did not make any adjustments to incorporate this change.

Understanding Material Accounting Policy Information

The amendments to IAS 1 underline the importance of disclosing material accounting policy information, which can significantly influence users’ understanding of the financial statements. Material accounting policy information is crucial if, without it, users would struggle to comprehend other material information in the financial statements.

Conversely, the standard also clarifies that immaterial accounting policy information need not be disclosed. However, if disclosed, it should not obscure material information, ensuring that the focus remains on what is truly important for the users.

To further support these amendments, the International Accounting Standards Board (IASB) also updated IFRS Practice Statement 2, “Making Materiality Judgements”, providing detailed guidance on applying the concept of materiality to accounting policy disclosures. This guidance is instrumental in helping entities assess which information is truly material.

Key Areas of Focus in Practice Statement 2

IFRS Practice Statement 2 offers valuable insights into the concept of materiality, particularly in the context of accounting policy disclosures. Four key areas are highlighted:

1. Materiality Definition: Information is considered material if omitting, misstating, or obscuring it could reasonably be expected to influence decisions made by the primary users of financial statements. Materiality is entity-specific, based on the nature or magnitude of the items in the context of the entity’s financial statements.
2. Primary Users: Primary users of financial statements are assumed to have a reasonable knowledge of business and economic activities. They include existing and potential investors, lenders, and creditors. Entities must consider whether these users need the disclosed information to understand other material aspects of the financial statements.
3. Qualitative and Quantitative Factors: In determining materiality, entities must consider both qualitative and quantitative factors. This assessment is critical in ensuring that the disclosed accounting policy information is relevant and useful.
4. Entity-Specific Information: One of the most challenging aspects of applying the new requirements is ensuring that accounting policy information is specific to the reporting the preparers, who must tailor the information to reflect the entity’s unique circumstances.

Practical Implications of the Changes

The shift from significant to material accounting policy information requires a careful reassessment of the content and structure of accounting policy disclosures. Entities must ensure that their disclosures are tailored to their specific circumstances, avoiding boilerplate or generic statements that do not add value for users.

The key to success in this transition lies in the principles applied during the revision process. These principles include:

• Compliance with IFRS: Ensuring that required disclosures are included.
• Relevance: Avoiding unnecessary disclosures that do not apply to the entity’s specific transactions or events.
• Avoidance of Duplication: Preventing the repetition of information within the accounting policies.
• Clarity and Judgment: Making complex or judgmental areas of accounting policy clear and understandable.

Conclusion

The amendments to IAS 1 represent a significant shift in the approach to accounting policy disclosures, moving towards a more focused and materiality-driven approach. Adapting to these changes is not just about compliance, but about improving the clarity and relevance of the financial information provided to stakeholders. By focusing on disclosing material accounting policy information, entities can offer users deeper insights into their financial statements, improving overall transparency.

As we move into new reporting periods, it’s crucial for preparers of financial statements to revisit their disclosures and make the necessary adjustments to align with the updated IAS 1 requirements. Don’t fall behind in meeting these new standards – review your accounting policies to ensure they meet the expectations of your users and the evolving regulatory landscape.