Corporate Law Blog

FASB Updates Materiality Guidance

The Financial Accounting Standards Board ("FASB") recently issued both a proposed Accounting Standards Update ("ASU") and a proposed concepts statement that address the issue of materiality in financial reporting. These proposals are part of FASB's disclosure framework project, a systematic effort to create a framework for financial statement disclosures to make them more effective. FASB's latest proposals clarify the definition of materiality and move it from the accounting realm into the legal one.

The proposed ASU addresses the fact that qualitative factors weigh in on issues of materiality in financial disclosures. Heretofore, the FASB found that most consideration of materiality centered nearly exclusively on the magnitude of monetary amounts. The update would state that "materiality is applied to quantitative and qualitative disclosures individually and in the aggregate in the context of the financial statements taken as a whole; therefore, some, all, or none of the requirements in a disclosure Section may be material." The definition of materiality would also be defined as a legal concept, and any omission of immaterial disclosures would not be considered an accounting error.

The corollary proposed concepts statement makes a similar change, removing the current definition of materiality in Chapter 3 of FASB Concepts Statement 8 and replacing it with the indication that materiality is a legal concept, a concept for which FASB specifically and conspicuously rejects promulgating a definition. Instead, FASB pulls from the Supreme Court definition of materiality in the context of securities regulation, stating the court's view (as set forth in TSC Industries, Inc. v. Northway, Inc., and Basic Inc. v. Levinson) 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."

These proposals seek to do away with inconsistencies between the legal concept of materiality and its usage in the disclosure framework, expanding the concept to include qualitative factors and placing the full definition of it squarely within the realm of the court system that would adjudicate the question of what disclosures are and are not material. Stakeholders had been concerned that the concept as outlined in the conceptual framework differed from the standard as set by the Supreme Court, leading to confusion.

For more information on materiality in financial disclosure statements or for assistance with drafting them, contact the corporate law attorneys at McBrayer.

This article does not constitute legal advice.