It’s a “Material” World…

Being an auditor for so long has instilled in me the importance of looking at issues, even the non-work related ones and then asking myself, “is this material relevant to the issues that I care about?” And I find that this approach helps me tremendously in deciding where to expend my energies. Along similar lines, not too long ago, FASB issued two proposals on the concept of materiality to help organizations decide the appropriateness of financial statement disclosures.

FASB proposes improvements to materiality to make financial statement disclosures more effective

Some of the specific disclosure review topics identified by the FASB as part of this project are defined benefit plans, inventory, fair value measurement and income taxes with a view to aligning the reporting entity’s decision process with that of its governing Board. Personally, in my private company reporting world, I think simplification of disclosures will actually add more meaning to the financial statements. For instance, how many users of private company financials understand or appreciate the detailed fair value disclosures prescribed under ASC 820? I suspect the answer to that is “very few.” This could well explain the issuance of ASU 2015-07 and ASU 2015-12 which eliminated certain fair value disclosures and simplified plan investment disclosure requirements for benefit plans.

Concept of Materiality

However, there are some that feel that this new FASB proposal could very well transform materiality into a strictly legal concept at the cost of loss of valuable information to investors. The example cited in the article was that a loss of a customer that represents 5% of total sales could be material if it caused a violation of the company’s debt covenants.

But one could counter-argue that if the company’s remaining customer base is financially sound and the company is cash flow positive, the loss of a 5% customer base could merely be a short term problem that can be easily overcome.

FASB is currently deliberating these proposed changes based on feedback received through the comment letter process. I, for one, am particularly interested in monitoring future developments on this topic. Stay tuned for updates.