HKFRS Practice Statement 2

Revised June 2023May 2024

Hong Kong Financial Reporting Standards Practice Statement 2

Making Materiality Judgements

 MAKING MATERIALITY JUDGEMENTS

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© Copyright 2024 Hong Kong Institute of Certified Public Accountants

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CONTENTS

from paragraph

INTRODUCTION IN1

HKFRS PRACTICE STATEMENT 2 MAKING MATERIALITY JUDGEMENTS

OBJECTIVE 1

SCOPE 3

GENERAL CHARACTERISTICS OF MATERIALITY 5

Definition of material 5

Materiality judgements are pervasive 8

Judgement 11

Primary users and their information needs 13

Decisions made by primary users 16

Meeting primary users’ information needs 21

Impact of publicly available information 24

INTERACTION WITH LOCAL LAWS AND REGULATIONS 27

MAKING MATERIALITY JUDGEMENTS 29

Overview of the materiality process 29

A four‑step materiality process 33

Step 1—identify 35

Step 2—assess 40

Step 3—organise 56

Step 4—review 60

SPECIFIC TOPICS 66

Prior‑period information 66

Prior‑period information not previously provided 70

Summarising prior‑period information 71

Errors 72

Cumulative errors 77

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Information about covenants 81

Materiality judgements for interim reporting 84

Interim reporting estimates 88

Information about accounting policies 88A

APPLICATION DATE 89

APPENDIX

BASIS FOR CONCLUSIONS

HKFRS Practice Statement 2 Making Materiality Judgements (Practice Statement) is set out in
paragraphs 1–89. This Practice Statement should be read in the context of its objective and Basis for
Conclusions, as well as in the context of the Preface to HKFRS Standards, the Conceptual Framework
for Financial Reporting and HKFRS Standards.

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Introduction
IN1 The objective of general purpose financial statements is to provide financial information about
a reporting entity that is useful to existing and potential investors, lenders and other creditors
in making decisions about providing resources to the entity. The entity identifies the
information necessary to meet that objective by making appropriate materiality judgements.
IN2 The aim of this HKFRS Practice Statement 2 Making Materiality Judgements (Practice
Statement) is to provide reporting entities with guidance on making materiality judgements
when preparing general purpose financial statements in accordance with HKFRS Standards.
While some of the guidance in this Practice Statement may be useful to entities applying
HKFRS for Private Entities, the Practice Statement is not intended for those entities.
IN3 The need for materiality judgements is pervasive in the preparation of financial statements. An
entity makes materiality judgements when making decisions about recognition and
measurement as well as presentation and disclosure. Requirements in HKFRS Standards only
need to be applied if their effect is material to the complete set of financial statements.
IN4 This Practice Statement:
(a) provides an overview of the general characteristics of materiality.
(b) presents a four‑step process an entity may follow in making materiality judgements
when preparing its financial statements (materiality process). The description of the
materiality process provides an overview of the role materiality plays in the
preparation of financial statements, with a focus on the factors the entity should
consider when making materiality judgements.
(c) provides guidance on how to make materiality judgements in specific circumstances,
namely, how to make materiality judgements about prior‑period information, errors
and covenants, and in the context of interim reporting.
IN5 Whether information is material is a matter of judgement and depends on the facts involved
and the circumstances of a specific entity. This Practice Statement illustrates the types of
factors that the entity should consider when judging whether information is material.
IN6 A Practice Statement is non‑mandatory guidance developed by the Hong Kong Institute of
Certified Public Accountants (HKICPA). It is not a Standard. Therefore, its application is not
required to state compliance with HKFRS Standards.
IN7 This Practice Statement includes examples illustrating how an entity might apply some of the
guidance in the Practice Statement based on the limited facts presented. The analysis in each
example is not intended to represent the only manner in which the guidance could be applied.

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HKFRS Practice Statement 2

Making Materiality Judgements

Objective
1 This HKFRS Practice Statement 2 Making Materiality Judgements (Practice Statement)
provides reporting entities with non‑mandatory guidance on making materiality judgements
when preparing general purpose financial statements in accordance with HKFRS Standards.
2 The guidance may also help other parties involved in financial reporting to understand how an
entity makes materiality judgements when preparing such financial statements.

Scope
3 The Practice Statement is applicable when preparing financial statements in accordance with
HKFRS Standards. It is not intended for entities applying HKFRS for Private Entities.
4 The Practice Statement provides non‑mandatory guidance; therefore, its application is not
required to state compliance with HKFRS Standards.

General characteristics of materiality

Definition of material
5 The Conceptual Framework for Financial Reporting (Conceptual Framework) provides the
following definition of material information (paragraph 7 of HKAS 1 Presentation of Financial
Statements provides a similar definition1):
Information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the primary users of general purpose financial
reports make on the basis of those reports, which provide financial information about
a specific reporting entity. In other words, materiality is an entity-specific aspect of
relevance based on the nature or magnitude, or both, of the items to which the
information relates in the context of an individual entity’s financial report.2
6 When making materiality judgements, an entity needs to take into account how information
could reasonably be expected to influence the primary users of its financial statements—its
primary users—when they make decisions3 on the basis of those statements (see paragraphs
13–23).4
7 The objective of financial statements is to provide financial information about a reporting entity
that is useful to existing and potential investors, lenders and other creditors in making
decisions about providing resources to the entity. 5 The entity identifies the information
necessary to meet that objective by making appropriate materiality judgements.

1
See paragraph 7 of HKAS 1 Presentation of Financial Statements.
2
Paragraph 2.11 of the Conceptual Framework for Financial Reporting (Conceptual Framework).
3
Throughout this Practice Statement, the term ‘decisions’ refers to decisions about providing resources to the entity, unless
specifically indicated otherwise.
4
See paragraph 7 of HKAS 1.
5
See paragraph 1.2 of the Conceptual Framework.

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Materiality judgements are pervasive

8 The need for materiality judgements is pervasive in the preparation of financial statements. An
entity makes materiality judgements when making decisions about recognition, measurement,
presentation and disclosure. Requirements in HKFRS Standards only need to be applied if
their effect is material to the complete set of financial statements,6 which includes the primary
financial statements7 and the notes. However, it is inappropriate for the entity to make, or
leave uncorrected, immaterial departures from HKFRS Standards to achieve a particular
presentation of its financial position, financial performance or cash flows. 8

Recognition and measurement

9 HKFRS Standards set out reporting requirements that the Hong Kong Institute of Certified
Public Accountants (HKICPA) has concluded will lead to financial statements that provide
information about the financial position, financial performance and cash flows of an entity that
is useful to the primary users of those statements. The entity is only required to apply
recognition and measurement requirements when the effect of applying them is material.

Example A—materiality judgements on the application of accounting policies

Background
An entity has a policy of capitalising expenditures on items of property, plant and
equipment (PP&E) in excess of a specified threshold and recognising any smaller
amounts as an expense.
Application
HKAS 16 Property, Plant and Equipment requires that the cost of an item of PP&E is
recognised as an asset when the criteria in paragraph 7 of HKAS 16 are met.
The entity has assessed that its accounting policy—not capitalising expenditure below a
specific threshold—will not have a material effect on the current‑period financial
statements or on future financial statements, because information reflecting the
capitalisation and amortisation of such expenditure could not reasonably be expected to
influence decisions made by the primary users of the entity’s financial statements.
Provided that such a policy does not have a material effect on the financial statements
and was not set to intentionally achieve a particular presentation of the entity’s financial
position, financial performance or cash flows, the entity’s financial statements comply
with HKAS 16. Such a policy is nevertheless reassessed each reporting period to ensure
that its effect on the entity’s financial statements remains immaterial.

Presentation and disclosure

10 An entity need not provide a disclosure specified by a HKFRS Standard if the information
resulting from that disclosure is not material. This is the case even if the Standard contains a
list of specific disclosure requirements or describes them as ‘minimum requirements’.
Conversely, the entity must consider whether to provide information not specified by HKFRS
Standards if that information is necessary for primary users to understand the impact of
particular transactions, other events and conditions on the entity’s financial position, financial
performance and cash flows. 9

6
In this Practice Statement the phrases ‘complete set of financial statements’ and ‘financial statements as a whole’ are
used interchangeably.
7
For the purposes of this Practice Statement, the primary financial statements comprise the statement of financial position,
statement(s) of financial performance, statement of changes in equity and statement of cash flows.
8
See paragraph 8 of HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
9
See paragraphs 17(c) and 31 of HKAS 1.

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Example B—materiality judgements on disclosures specified by HKFRS Standards

Background
An entity presents property, plant and equipment (PP&E) as a separate line item in its
statement of financial position.
Application
HKAS 16 Property, Plant and Equipment sets out specific disclosure requirements for
PP&E, including the disclosure of the amount of contractual commitments for the
acquisition of PP&E (paragraph 74(c) of HKAS 16).
When preparing its financial statements, the entity assesses whether disclosures
specified in HKAS 16 are material information. Even if PP&E is presented as a separate
line item in the statement of financial position, not all disclosures specified in HKAS 16
will automatically be required. In the absence of any qualitative considerations (see
paragraphs 46–51), if the amount of contractual commitments for the acquisition of PP&E
is not material, the entity is not required to disclose this information.

Example C—materiality judgements that lead to the disclosure of information in

addition to the specific disclosure requirements in HKFRS Standards
Background
An entity has its main operations in a country that, as part of an international agreement,
is committed to introducing regulations to reduce the use of carbon‑based energy. The
regulations had not yet been enacted in the national legislation of that country at the end
of the reporting period.
The entity owns a coal‑fired power station in that country. During the reporting period, the
entity recorded an impairment loss on its coal‑fired power station, reducing the carrying
amount of the power station to its recoverable amount. No goodwill or intangible assets
with an indefinite useful life were included in the cash‑generating unit.
Application
Paragraph 132 of HKAS 36 Impairment of Assets does not require an entity to disclose
the assumptions used to determine the recoverable amount of a tangible asset, unless
goodwill or intangible assets with an indefinite useful life are included in the carrying
amount of the cash‑generating unit.
Nevertheless, the entity has concluded that the assumptions about the likelihood of
national enactment of regulations to reduce the use of carbon‑based energy, as well as
about the enactment plan, it considered in measuring the recoverable amount of its
coal‑fired power station could reasonably be expected to influence decisions primary
users make on the basis of the entity’s financial statements. Hence, information about
those assumptions is necessary for primary users to understand the impact of the
impairment on the entity’s financial position, financial performance and cash flows.
Therefore, even though not specifically required by HKAS 36, the entity concludes that its
assumptions about the likelihood of national enactment of regulations to reduce the use
of carbon‑based energy, as well as about the enactment plan, constitute material
information and discloses those assumptions in its financial statements.

Judgement
11 When assessing whether information is material to the financial statements, an entity applies
judgement to decide whether the information could reasonably be expected to influence
decisions that primary users make on the basis of those financial statements. When applying
such judgement, the entity considers both its specific circumstances and how the information
provided in the financial statements responds to the information needs of primary users.

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12 Because an entity’s circumstances change over time, materiality judgements are reassessed
at each reporting date in the light of those changed circumstances.

Primary users and their information needs

13 When making materiality judgements, an entity needs to consider the impact information could
reasonably be expected to have on the primary users of its financial statements. Those primary
users are existing and potential investors, lenders and other creditors—those users who
cannot require entities to provide information directly to them and must rely on general purpose
financial statements for much of the financial information they need. 10 In addition to those
primary users, other parties, such as the entity’s management, regulators and members of the
public, may be interested in financial information about the entity and may find the financial
statements useful. However, the financial statements are not primarily directed at these other
parties.11
14 Because primary users include potential investors, lenders and other creditors, it would be
inappropriate for an entity to narrow the information provided in its financial statements by
focusing only on the information needs of existing investors, lenders and other creditors.

Example D—existing and potential investors, lenders and other creditors

Background
An entity is 100 per cent owned by its parent. Its parent provides the entity with
semi‑finished products that the entity assembles and sells back to the parent. The entity
is entirely financed by its parent. The current users of the entity’s financial statements
include the parent and the entity’s creditors (mainly local suppliers).
Application
The entity refers to the Conceptual Framework for Financial Reporting to identify the
primary users of its financial statements—existing and potential investors, lenders and
other creditors who cannot require the entity to provide information directly to them and
must rely on general purpose financial statements. When making materiality judgements
in the preparation of its financial statements, the entity does not reduce its disclosures to
only those of interest to its parent or its existing creditors. The entity also considers the
information needs of potential investors, lenders and other creditors when making those
judgements.

15 When making materiality judgements, an entity also considers that primary users are expected
to have a reasonable knowledge of business and economic activities and to review and
analyse the information included in the financial statements diligently.12

Decisions made by primary users

16 An entity needs to consider what type of decisions its primary users make on the basis of the
financial statements and, consequently, what information they need to make those decisions.
17 The primary users of an entity’s financial statements make decisions about providing
resources to the entity. Those decisions involve: buying, selling or holding equity and debt
instruments, providing or settling loans and other forms of credit, and exercising rights while
holding investments (such as the right to vote on or otherwise influence management’s actions
that affect the use of the entity’s economic resources).13 Such decisions depend on the returns
that primary users expect from an investment in those instruments.

10
See paragraph 1.5 of the Conceptual Framework.
11
See paragraphs 1.9 and 1.10 of the Conceptual Framework.
12
See paragraph 2.36 of the Conceptual Framework.
13
See paragraph 1.2 of the Conceptual Framework.

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18 The expectations existing and potential investors, lenders and other creditors have about
returns, in turn, depend on their assessment of the amount, timing and uncertainty of the future
net cash inflows to an entity,14 together with their assessment of management’s stewardship
of the entity’s resources.
19 Consequently, an entity’s primary users need information about:
(a) the resources of the entity (assets), claims against the entity (liabilities and equity)
and changes in those resources and claims (income and expenses); and
(b) how efficiently and effectively the entity’s management and governing board have
discharged their responsibility to use the entity’s resources.15
20 Financial information can make a difference in decisions if it has predictive value, confirmatory
value or both.16 When making materiality judgements, an entity needs to assess whether
information could reasonably be expected to influence primary users’ decisions, rather than
assessing whether that information alone could reasonably be expected to change their
decisions.

Meeting primary users’ information needs

21 The objective of financial statements is to provide primary users with financial information that
is useful to them in making decisions about providing resources to an entity. However, general
purpose financial statements do not, and cannot, provide all the information that primary users
need.17 Therefore, the entity aims to meet the common information needs of its primary users.
It does not aim to address specialised information needs—information needs that are unique
to particular users.

Example E—primary users’ unique or individual information requests

Background
Twenty investors each hold 5 per cent of an entity’s voting rights. One of these investors
is particularly interested in information about the entity’s expenditure in a specific location
because that investor operates another business in that location. Such information could
not reasonably be expected to influence decisions that other primary users make on the
basis of the entity’s financial statements.
Application
In making its materiality judgements, the entity does not need to consider the specific
information needs of that single investor. The entity concludes that information about its
expenditure in the specific location is immaterial information for its primary users as a
group and therefore decides not to provide it in its financial statements.

22 To meet the common information needs of its primary users, an entity first separately identifies
the information needs that are shared by users within one of the three categories of primary
users defined in the Conceptual Framework—for example investors (existing and potential)—
then repeats the assessment for the two remaining categories—namely lenders (existing and
potential) and other creditors (existing and potential). The total of the information needs
identified is the set of common information needs the entity aims to meet.
23 In other words, the assessment of common information needs does not require identifying
information needs shared across all existing and potential investors, lenders and other
creditors. Some of the identified information needs will be common to all three categories, but
others may be specific to only one or two of those categories. If an entity were to focus only

14
See paragraph 1.3 of the Conceptual Framework.
15
See paragraph 1.4 of the Conceptual Framework.
16
See paragraph 2.7 of the Conceptual Framework.
17
See paragraph 1.6 of the Conceptual Framework.

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on those information needs that are common to all categories of primary users, it might exclude
information that meets the needs of only one category.

Impact of publicly available information

24 The primary users of financial statements generally consider information from sources other
than just the financial statements. For example, they might also consider other sections of the
annual report, information about the industry an entity operates in, its competitors and the
state of the economy, the entity’s press releases as well as other documents the entity has
published.
25 However, the financial statements are required to be a comprehensive document that provides
information about the financial position, financial performance and cash flows of an entity that
is useful to primary users in making decisions about providing resources to the entity.
Consequently, the entity assesses whether information is material to the financial statements,
regardless of whether such information is also publicly available from another source.
26 Moreover, public availability of information does not relieve an entity of the obligation to provide
material information in its financial statements.

Example F—impact of an entity’s press release on materiality judgements

Background
An entity undertook a business combination in the reporting period. The acquisition
doubled the size of the entity’s operations in one of its main markets. On the acquisition
date, the entity issued a press release providing an extensive explanation of the primary
reasons for the business combination and a description of how it obtained control over
the acquired business, together with other information related to the acquisition.
Application
In preparing its financial statements, the entity first considered the disclosure
requirements in HKFRS 3 Business Combinations. Paragraph B64(d) of HKFRS 3
requires an entity to disclose, for each business combination that occurs during the
reporting period, ‘the primary reasons for the business combination and a description of
how the acquirer obtained control of the acquiree’.
The entity concludes that information about the business combination is material because
the acquisition is expected to have a significant impact on the entity’s operations, due to
the overall size of the transaction compared with the size of the entity. In these
circumstances, even though information relating to the primary reasons for the business
combination and the description of how it obtained control is already included in a public
statement, the entity needs to provide the information in its financial statements.

Interaction with local laws and regulations

27 An entity’s financial statements must comply with the requirements in HKFRS Standards,
including requirements related to materiality (materiality requirements), for the entity to state
its compliance with those Standards. Hence, an entity that wishes to state compliance with
HKFRS Standards cannot provide less information than the information required by the
Standards, even if local laws and regulations permit otherwise.
28 Nevertheless, local laws and regulations may specify requirements that affect what information
is provided in the financial statements. In such circumstances, providing information to meet
local legal or regulatory requirements is permitted by HKFRS Standards, even if that
information is not material according to the materiality requirements in the Standards.

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However, such information must not obscure information that is material according to HKFRS
Standards.18

Example G—information that is immaterial according to HKFRS Standards required

by local laws and regulations
Background
An entity is a food retailer operating in country ABC. In country ABC, investments in
research and development (R&D) are generally limited across the industry; nonetheless,
the government requires all entities to disclose, in their financial statements, the
aggregate amount of R&D expenditure incurred during the period.
In the current reporting period, the entity recognised a small amount of expenditure on
R&D activities as an expense. No R&D expenditure was capitalised during the period.
When preparing its financial statements, the entity assessed the disclosure of information
about R&D expenditure incurred during the period as immaterial, for HKFRS purposes.
Application
To comply with local regulations, the entity discloses in its financial statements
information about R&D expenditure incurred during the period. HKFRS Standards permit
the entity to disclose that information in its financial statements, but the entity needs to
organise its disclosures to ensure that material information is not obscured.

Example H—information that is material according to HKFRS Standards not

required by local laws and regulations
Background
An entity operates in a country where the government requires the disclosure of the
details of property, plant and equipment (PP&E) disposals, but only if their carrying
amounts exceed a specified percentage of total assets.
In the current reporting period, the entity disposed of PP&E below the threshold specified
in the local regulation. This transaction was with a related party, which paid the entity less
than the fair value of the item disposed.
When preparing its financial statements, the entity applied judgement and concluded that
information about the details of the disposal was material, mainly because of the terms of
the transaction and the fact it was with a related party.
Application
To comply with HKFRS Standards, the entity discloses details of that disposal even
though local regulations require disclosure of PP&E disposals only if their carrying
amount exceeds a specified percentage of total assets.

Making materiality judgements

Overview of the materiality process

29 An entity may find it helpful to follow a systematic process in making materiality judgements
when preparing its financial statements. The four‑step process described in the following
paragraphs is an example of such a process. This description provides an overview of the role
materiality plays in the preparation of financial statements, with a focus on the factors the entity

18
See paragraph 30A of HKAS 1 and paragraph BC30F of the Basis for Conclusions on HKAS 1.

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should consider when making materiality judgements. In this Practice Statement, this four‑
step process is called the ‘materiality process’.
30 The materiality process describes how an entity could assess whether information is material
for the purposes of presentation and disclosure, as well as for recognition and measurement.
The process illustrates one possible way to make materiality judgements, but it incorporates
the materiality requirements an entity must apply to state compliance with HKFRS Standards.
The materiality process considers potential omission and potential misstatement of
information, as well as unnecessary inclusion of immaterial information and whether
immaterial information obscures material information. In all cases, the entity needs to focus on
how the information could reasonably be expected to influence decisions of the primary users
of its financial statements.
31 Judgement is involved in assessing materiality when preparing financial statements. The
materiality process is designed as a practice guide to help an entity apply judgement in an
efficient and effective way.
32 The materiality process is not intended to describe the assessment of materiality for local legal
and regulatory purposes. An entity refers to its local requirements to assess whether it is
compliant with local laws and regulations.

A four‑step materiality process

33 The steps identified as a possible approach to the assessment of materiality in the preparation
of the financial statements are, in summary:
(a) Step 1—identify. Identify information that has the potential to be material.
(b) Step 2—assess. Assess whether the information identified in Step 1 is, in fact,
material.
(c) Step 3—organise. Organise the information within the draft financial statements in a
way that communicates the information clearly and concisely to primary users.
(d) Step 4—review. Review the draft financial statements to determine whether all
material information has been identified and materiality considered from a wide
perspective and in aggregate, on the basis of the complete set of financial statements.
34 When preparing its financial statements, an entity may rely on materiality assessments from
prior periods, provided that it reconsiders them in the light of any change in circumstances and
of any new or updated information.

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Diagram 1 —the four-step materiality process

Step 1 Requirements Knowledge about primary users’

Identify of HKFRS Standards common information needs

Quantitative Qualitative
factors factors
Step 2
entity-specific
Assess and external

Organise the information within

Step 3 the draft financial statements
Organise

Review the draft

Step 4 financial statements
Review

Step 1—identify
35 An entity identifies information about its transactions, other events and conditions that primary
users might need to understand to make decisions about providing resources to the entity.
36 In identifying this information, an entity considers, as a starting point, the requirements of the
HKFRS Standards applicable to its transactions, other events and conditions. This is the
starting point because, when developing a Standard, the HKICPA identifies the information it
expects will meet the needs of a broad range of primary users for a wide variety of entities in
a range of circumstances.19
37 When the HKICPA develops a Standard, it also considers the balance between the benefits
of providing information and the costs of complying with the requirements in that Standard.
However, the cost of applying the requirements in the Standards is not a factor for an entity to
consider when making materiality judgements—the entity should not consider the cost of
complying with requirements in HKFRS Standards, unless there is explicit permission in the
Standards.

19
See paragraph 1.8 of the Conceptual Framework.

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38 An entity also considers its primary users’ common information needs (as explained in
paragraphs 21–23) to identify any information—in addition to that specified in HKFRS
Standards—necessary to enable primary users to understand the impact of the entity’s
transactions, other events and conditions on the entity’s financial position, financial
performance and cash flows (see paragraph 10). Existing and potential investors, lenders and
other creditors need information about the resources of the entity (assets), claims against the
entity (liabilities and equity) and changes in those resources and claims (income and
expenses), and information that will help them assess how efficiently and effectively the
entity’s management and governing board have discharged their responsibility to use the
entity’s resources. 20
39 The output of Step 1 is a set of potentially material information.

Step 2—assess
40 An entity assesses whether the potentially material information identified in Step 1 is, in fact,
material. In making this assessment, the entity needs to consider whether its primary users
could reasonably be expected to be influenced by the information when making decisions
about providing resources to the entity on the basis of the financial statements. The entity
performs this assessment in the context of the financial statements as a whole.
41 An entity might conclude that an item of information is material for various reasons. Those
reasons include the item’s nature or magnitude, or a combination of both, judged in relation to
the particular circumstances of the entity.21 Therefore, making materiality judgements involves
both quantitative and qualitative considerations. It would not be appropriate for the entity to
rely on purely numerical guidelines or to apply a uniform quantitative threshold for materiality
(see paragraphs 53–55).
42 The following paragraphs describe some common ‘materiality factors’ that an entity should
use to help identify when an item of information is material. These factors are organised into
the following categories:
(a) quantitative; and
(b) qualitative—either entity‑specific or external.
43 The output of Step 2 is a preliminary set of material information. For presentation and
disclosure, this involves decisions about what information an entity needs to provide in its
financial statements, and in how much detail 22 (including identifying appropriate levels of
aggregation an entity provides in the financial statements). For recognition and measurement,
the output of Step 2 involves the identification of information that, if not recognised or otherwise
misstated, could reasonably be expected to influence primary users’ decisions.

Quantitative factors
44 An entity ordinarily assesses whether information is quantitatively material by considering the
size of the impact of the transaction, other event or condition against measures of the entity’s
financial position, financial performance and cash flows. The entity makes this assessment by
considering not only the size of the impact it recognises in its primary financial statements but
also any unrecognised items that could ultimately affect primary users’ overall perception of
the entity’s financial position, financial performance and cash flows (eg contingent liabilities or
contingent assets). The entity needs to assess whether the impact is of such a size that
information about the transaction, other event or condition could reasonably be expected to
influence its primary users’ decisions about providing resources to the entity.
45 Identifying the measures against which an entity makes this quantitative assessment is a
matter of judgement. That judgement depends on which measures are of great interest to the
primary users of the entity’s financial statements. Examples include measures of the entity’s
revenues, the entity’s profitability, financial position ratios and cash flow measures.

20
See paragraph 1.4 of the Conceptual Framework.
21
See paragraph 7 of HKAS 1.
22
See paragraph 29 of HKAS 1.

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Qualitative factors
46 For the purposes of this Practice Statement, qualitative factors are characteristics of an entity’s
transactions, other events or conditions, or of their context, that, if present, make information
more likely to influence the decisions of the primary users of the entity’s financial statements.
The mere presence of a qualitative factor will not necessarily make the information material,
but is likely to increase primary users’ interest in that information.
47 In making materiality judgements, an entity considers both entity ‑ specific and external
qualitative factors. These factors are described separately in the following paragraphs.
However, in practice, the entity may need to consider them together.
48 An entity‑specific qualitative factor is a characteristic of the entity’s transaction, other event or
condition. Examples of such factors include, but are not limited to:
(a) involvement of a related party of the entity;
(b) uncommon, or non‑standard, features of a transaction or other event or condition; or
(c) unexpected variation or unexpected changes in trends. In some circumstances, the
entity might consider a quantitatively immaterial amount as material because of the
unexpected variation compared to the prior‑period amount provided in its financial
statements.
49 The relevance of information to the primary users of an entity’s financial statements can also
be affected by the context in which the entity operates. An external qualitative factor is a
characteristic of the context in which the entity’s transaction, other event or condition occur
that, if present, makes information more likely to influence the primary users’ decisions.
Characteristics of the entity’s context that might represent external qualitative factors include,
but are not limited to, the entity’s geographical location, its industry sector, or the state of the
economy or economies in which the entity operates.
50 Due to the nature of external qualitative factors, entities operating in the same context might
share a number of external qualitative factors. Moreover, external qualitative factors could
remain constant over time or could vary.
51 In some circumstances, if an entity is not exposed to a risk to which other entities in its industry
are exposed, that fact could reasonably be expected to influence its primary users’ decisions;
that is, information about the lack of exposure to that particular risk could be material
information.

Interaction of qualitative and quantitative factors

52 An entity could identify an item of information as material on the basis of one or more
materiality factors. In general, the more factors that apply to a particular item, or the more
significant those factors are, the more likely it is that the item is material.
53 Although there is no hierarchy among materiality factors, assessing an item of information
from a quantitative perspective first could be an efficient approach to assessing materiality. If
an entity identifies an item of information as material solely on the basis of the size of the
impact of the transaction, other event or condition, the entity does not need to assess that item
of information further against other materiality factors. In these circumstances, a quantitative
threshold—a specified level, rate or amount of one of the measures used in assessing size—
can be a helpful tool in making a materiality judgement. However, a quantitative assessment
alone is not always sufficient to conclude that an item of information is not material. The entity
should further assess the presence of qualitative factors.
54 The presence of a qualitative factor lowers the thresholds for the quantitative assessment. The
more significant the qualitative factors, the lower those quantitative thresholds will be.
However, in some cases an entity might decide that, despite the presence of qualitative
factors, an item of information is not material because its effect on the financial statements is
so small that it could not reasonably be expected to influence primary users’ decisions.

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55 In some other circumstances, an item of information could reasonably be expected to influence

primary users’ decisions regardless of its size—a quantitative threshold could even reduce to
zero. This might happen when information about a transaction, other event or condition is
highly scrutinised by the primary users of an entity’s financial statements. Moreover, a
quantitative assessment is not always possible: non ‑ numeric information might only be
assessed from a qualitative perspective.

Example I—information about a related party transaction assessed as material

Background
An entity has identified measures of its profitability as the measures of great interest to
the primary users of its financial statements. In the current reporting period, the entity
signed a five‑year contract with company ABC. Company ABC will provide the entity with
maintenance services for the entity’s offices for an annual fee. Company ABC is
controlled by a member of the entity’s key management personnel. Hence, company
ABC is a related party of the entity.
Application
HKAS 24 Related Party Disclosures requires an entity to disclose, for each related party
transaction that occurred during the period, the nature of the related party relationship as
well as information about the transaction and outstanding balances, including
commitments, necessary for users to understand the potential effect of the relationship
on the financial statements.
When preparing its financial statements, the entity assessed whether information about
the transaction with company ABC was material.
The entity started its assessment from a quantitative perspective and evaluated the
impact of the related party transaction against measures of the entity’s profitability.
Having initially concluded that the impact of the related party transaction was not material
from a purely quantitative perspective, the entity further assessed the presence of any
qualitative factors.
As the HKICPA noted in developing HKAS 24, related parties may enter into transactions
that unrelated parties would not enter into, and the transactions may be priced at
amounts that differ from the price for transactions between unrelated parties.
The entity identified the fact that the maintenance agreement was concluded with a
related party as a characteristic that makes information about that transaction more likely
to influence the decisions of its primary users.
The entity further assessed the transaction from a quantitative perspective to determine
whether the impact of the transaction could reasonably be expected to influence primary
users’ decisions when considered with the fact that the transaction was with a related
party (ie the presence of a qualitative factor lowers the quantitative threshold). Having
considered that the transaction was with a related party, the entity concluded that the
impact was large enough to reasonably be expected to influence primary users’
decisions. Hence, the entity assessed information about the transaction with company
ABC as material and disclosed that information in its financial statements.

Example J—information about a related party transaction assessed as immaterial

Background
An entity has identified measures of its profitability as the measures of great interest to
the primary users of its financial statements. The entity owns a large fleet of vehicles. In
the current reporting period, the entity sold an almost fully depreciated vehicle to
company DEF. The entity transferred the vehicle for total consideration consistent with its
market value and its carrying amount. Company DEF is controlled by a member of the
entity’s key management personnel. Hence, company DEF is a related party of the entity.
continued…

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…continued
Application
When preparing its financial statements, the entity assessed whether information about
the transaction with company DEF was material.
As in Example I, the entity started its assessment from a quantitative perspective and
evaluated the impact of the related party transaction against measures of the entity’s
profitability. Having initially concluded that the impact of the related party transaction was
not material from a purely quantitative perspective, the entity further assessed the
presence of any qualitative factors.
The entity transferred the vehicle for a total consideration consistent with its market value
and its carrying amount. However, the entity identified the fact that the vehicle was sold to
a related party as a characteristic that makes information about that transaction more
likely to influence the decisions of its primary users.
The entity further assessed the transaction from a quantitative perspective but concluded
that its impact was too small to reasonably be expected to influence primary users’
decisions, even when considered with the fact that the transaction was with a related
party. Information about the transaction with company DEF was consequently assessed
as immaterial and not disclosed in the entity’s financial statements.

Example K—influence of external qualitative factors on materiality judgements

Background
An international bank holds a very small amount of debt originating from a country whose
national economy is currently experiencing severe financial difficulties. Other international
banks that operate in the same sector as the entity hold significant amounts of debt
originating from that country and, hence, are significantly affected by the financial
difficulties in that country.
Application
Paragraph 31 of HKFRS 7 Financial Instruments: Disclosures requires an entity to
disclose information that enables users of its financial statements to evaluate the nature
and extent of risk arising from financial instruments to which the entity is exposed at the
end of the reporting period.
When preparing its financial statements, the bank assessed whether the fact that it holds
a very small amount of debt originating from that country was material information.
In making that assessment, the bank considered the exposure to that particular debt
faced by other international banks operating in the same sector (external qualitative
factor).
In these circumstances, the fact that the bank is holding a very small amount of debt (or
even no debt at all) originating from that country, while other international banks
operating in the same sector have significant holdings, provides the entity’s primary users
with useful information about how effective management has been at protecting the
bank’s resources from unfavourable effects of the economic conditions in that country.
The bank assessed the information about the lack of exposure to that particular debt as
material and disclosed that information in its financial statements.

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Step 3—organise
56 Classifying, characterising and presenting information clearly and concisely makes it
understandable. 23 An entity exercises judgement when deciding how to communicate
information clearly and concisely. For example, the entity is more likely to clearly and concisely
communicate the material information identified in Step 2 by organising it to:
(a) emphasise material matters;
(b) tailor information to the entity’s own circumstances;
(c) describe the entity’s transactions, other events and conditions as simply and directly
as possible without omitting material information and without unnecessarily
increasing the length of the financial statements;
(d) highlight relationships between different pieces of information;
(e) provide information in a format that is appropriate for its type, eg tabular or narrative;
(f) provide information in a way that maximises, to the extent possible, comparability
among entities and across reporting periods;
(g) avoid or minimise duplication of information in different parts of the financial
statements; and
(h) ensure material information is not obscured by immaterial information.
57 Financial statements are less understandable for primary users if information is organised in
an unclear manner. Similarly, financial statements are less understandable if an entity
aggregates material items that have different natures or functions, or if material information is
obscured, 24 for example, by an excessive amount of immaterial information.
58 Furthermore, an entity considers the different roles of primary financial statements and notes
in deciding whether to present an item of information separately in the primary financial
statements, to aggregate it with other information or to disclose the information in the notes.
59 The output of Step 3 is the draft financial statements.

Step 4—review
60 An entity needs to assess whether information is material both individually and in combination
with other information25 in the context of its financial statements as a whole. Even if information
is judged not to be material on its own, it might be material when considered in combination
with other information in the complete set of financial statements.
61 When reviewing its draft financial statements, an entity draws on its knowledge and experience
of its transactions, other events and conditions to identify whether all material information has
been provided in the financial statements, and with appropriate prominence.
62 This review gives an entity the opportunity to ‘step back’ and consider the information provided
from a wider perspective and in aggregate. This enables the entity to consider the overall
picture of its financial position, financial performance and cash flows. In performing this review,
the entity also considers whether:
(a) all relevant relationships between different items of information have been identified.
Identifying new relationships between information might lead to that information being
identified as material for the first time.
(b) items of information that are individually immaterial, when considered together, could
nevertheless reasonably be expected to influence primary users’ decisions.

23
See paragraph 2.34 of the Conceptual Framework.
24
See paragraph 30A of HKAS 1.
25
See paragraph 7 of HKAS 1.

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(c) the information in the financial statements is communicated in an effective and

understandable way, and organised to avoid obscuring material information.
(d) the financial statements provide a fair presentation of the entity’s financial position,
financial performance and cash flows. 26
63 The review may lead to:
(a) additional information being provided in the financial statements;
(b) greater disaggregation of information that had already been identified as material;
(c) information that had already been identified as immaterial being removed from the
financial statements to avoid obscuring material information; or
(d) information being reorganised within the financial statements.
64 The review in Step 4 may also lead an entity to question the assessment performed in Step 2
and decide to re‑perform that assessment. As a result of re‑performing its assessment in
Step 2, the entity might conclude that information previously identified as material is, in fact,
immaterial, and remove it from the financial statements.
65 The output of Step 4 is the final financial statements.

Specific topics

Prior‑period information
66 An entity makes materiality judgements on the complete set of financial statements, including
prior‑period27 information provided in the financial statements.
67 HKFRS Standards require an entity to present information in respect of the preceding period
for all amounts reported in the current ‑ period financial statements. 28 Furthermore, the
Standards require the entity to provide prior‑period information for narrative and descriptive
information if it is relevant to understanding the current‑period financial statements.29 Finally,
the Standards require the entity to present, as a minimum, two statements of financial position,
two statements of profit or loss and other comprehensive income, two statements of profit or
loss (if presented separately), two statements of cash flows, two statements of changes in
equity, and related notes.30 These requirements are the minimum comparative information
identified by the Standards.31
68 Assessing whether prior ‑ period information is material to the current ‑ period financial
statements might lead an entity to:
(a) provide more prior‑period information than was provided in the prior‑period financial
statements (see paragraph 70); or
(b) provide less prior‑period information than was provided in the prior‑period financial
statements (see paragraph 71).

26
See paragraph 15 of HKAS 1.
27
For this Practice Statement, ‘prior‑period’ should be read as ‘prior‑periods’ if financial statements include amounts and
disclosures for more than one prior period.
28
Except when HKFRS Standards permit or require otherwise. See paragraph 38 of HKAS 1.
29
See paragraph 38 of HKAS 1.
30
See paragraph 38A of HKAS 1.
31
Paragraph 10(f) of HKAS 1 also requires an entity to provide a statement of financial position as at the beginning of the
preceding period when the entity applies an accounting policy retrospectively or makes a retrospective restatement of
items in its financial statements, or when it reclassifies items in its financial statements in accordance with paragraphs
40A–40D of HKAS 1.

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69 An entity also needs to consider any local laws or regulations, in respect of the prior‑period
information to be provided in financial statements, when making decisions on what prior‑
period information to provide in the current‑period financial statements. Those local laws or
regulations might require the entity to provide in the financial statements prior ‑ period
information in addition to the minimum comparative information required by the Standards.
The Standards permit the inclusion of such additional information, but require that it is
prepared in accordance with the Standards32 and does not obscure material information.33
However, an entity that wishes to state compliance with HKFRS Standards cannot provide
less information than required by the Standards, even if local laws and regulations permit
otherwise.

Prior‑period information not previously provided

70 An entity must provide prior‑period information needed to understand the current‑period
financial statements,34 regardless of whether that information was provided in the prior‑period
financial statements—this requirement is not conditional on whether the prior ‑ period
information was provided in the prior‑period financial statements. Consequently, the inclusion
of prior‑period information not previously included would be required if this is necessary for
the primary users to understand the current‑period financial statements.

Example L—prior‑period information not previously provided

Background
In the prior period, an entity had a very small amount of debt outstanding. Information
about this debt was appropriately assessed as immaterial in the prior period, and so the
entity did not disclose any maturity analysis showing the remaining contractual maturities
or other information that would otherwise be required by paragraph 39(a) of HKFRS 7
Financial Instruments: Disclosures.
In the current period, the entity issued a large amount of debt. The entity concluded that
information about debt maturity was material information and disclosed it, in the form of a
table, in the current‑period financial statements.
Application
The entity might conclude that including a prior‑period debt maturity analysis in the
financial statements would be necessary for primary users to understand the current‑
period financial statements. In these circumstances, a narrative description of the
maturity of the prior‑period balances of the outstanding debt might be sufficient.

Summarising prior‑period information

71 Except to the extent required to comply with any local laws or regulations affecting the
preparation of financial statements or their audit, an entity does not automatically reproduce
in the current‑period financial statements all the information provided in the prior‑period
financial statements. Instead, the entity may summarise prior‑period information, retaining the
information necessary for primary users to understand the current‑period financial statements.

32
See paragraph 38C of HKAS 1.
33
See paragraph 30A of HKAS 1 and paragraph BC30F of the Basis for Conclusions on HKAS 1.
34
See paragraph 38 of HKAS 1.

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Example M—summarising prior‑period information

Background
An entity disclosed, in the prior‑period financial statements, details of a legal dispute
which led to the recognition, in that period, of a provision. In accordance with HKAS 37
Provisions, Contingent Liabilities and Contingent Assets the entity disclosed in the prior‑
period financial statements a detailed description of uncertainties about the amount and
timing of possible cash outflows, in respect of the dispute, together with the major
assumptions made concerning future events.
Most of the uncertainties have been resolved in the current period, and, even though the
liability has not been settled, a court pronouncement confirmed the amount already
recognised in the financial statements by the entity.
The entity considered the relevant local laws, regulations and other reporting
requirements and concluded that there were no locally prescribed obligations relating to
the inclusion of prior‑period information in the current‑period financial statements.
Application
In these circumstances, on the basis of the requirements in HKFRS Standards, the entity
may not need to reproduce in the current‑period financial statements all of the
information about the legal dispute provided in the prior‑period financial statements.
Because most of the uncertainties have been resolved, users of the financial statements
for the current period may no longer need detailed information about those uncertainties.
Instead, information about those uncertainties might be summarised and updated to
reflect the current‑period events and circumstances and the resolution of previously
reported uncertainties.

Errors
72 Errors are omissions from and/or misstatements in an entity’s financial statements arising from
a failure to use, or misuse of, reliable information that is available, or could reasonably be
expected to be obtained. 35 Material errors are errors that individually or collectively could
reasonably be expected to influence decisions that primary users make on the basis of those
financial statements. Errors may affect narrative descriptions disclosed in the notes as well as
amounts reported in the primary financial statements or in the notes.
73 An entity must correct all material errors, as well as any immaterial errors made intentionally
to achieve a particular presentation of its financial position, financial performance or cash
flows, to ensure compliance with HKFRS Standards. 36 The entity should refer to HKAS 8
Accounting Policies, Changes in Accounting Estimates and Errors for guidance on how to
correct an error.
74 Immaterial errors, if not made intentionally to achieve a particular presentation, do not need to
be corrected to ensure compliance with HKFRS Standards. However, correcting all errors
(including those that are not material) in the preparation of the financial statements lowers the
risk that immaterial errors will accumulate over reporting periods and become material.
75 An entity assesses whether an error is material by applying the same considerations as
outlined in the description of the materiality process. Making materiality judgements about
errors involves both quantitative and qualitative considerations. The entity identifies
information that, if misstated or omitted, could reasonably be expected to influence primary
users’ decisions (as described in Step 1 and Step 2 of the materiality process). The entity also
considers whether any identified errors are material on a collective basis (as described in Step
4 of the materiality process).

35
See paragraph 5 of HKAS 8 (derived from the definition of prior‑period errors).
36
See paragraph 41 of HKAS 8.

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76 If an error is judged not to be material on its own, it might be regarded as material when
considered in combination with other information. However, in general, if an error is individually
assessed as material to an entity’s financial statements, the existence of other errors that
affect the entity’s financial position, financial performance or cash flows in the opposite way,
does not make the error immaterial, nor does it eliminate the need to correct the error.

Example N—individual and collective assessment of errors

Background
An entity has identified measures of its profitability as the measures of great interest to
the primary users of its financial statements. During the current reporting period, the
entity recognised:
(a) an expense accrual of CU100(a) that should not have been recognised. The
accrual affected the line item ‘cost of services’.
(b) the reversal of a provision of CU80 recognised in the previous period that should
not have been reversed. The reversal affected the line item ‘other operating
income (expense)’.
Application
In assessing whether these errors are material to its financial statements, the entity did
not identify the presence of any qualitative factors and thus made its materiality
judgement solely from a quantitative perspective. The entity concluded that both errors
were individually material because of their impact on its profit.
In these circumstances, it would be inappropriate to consider the quantitative effect of the
errors on a net basis, ie as a CU20 overstatement of expenses, thereby concluding that
the identified errors do not need to be corrected. If an error is individually assessed as
material to the entity’s financial statements, the existence of other errors that affect the
entity’s financial position, financial performance or cash flows in an opposite way, does
not eliminate the need to correct it, or make the error immaterial.

(a) In this example, currency amounts are denominated in ‘currency units’ (CU).

Cumulative errors
77 An entity may, over a number of reporting periods, accumulate errors that were immaterial,
both in individual prior periods and cumulatively over all prior periods. Uncorrected errors that
have accumulated over more than one period are sometimes called ‘cumulative errors’.
78 Materiality judgements about cumulative errors in prior‑period financial statements that an
entity made at the time those statements were authorised for issue need not be revisited in
subsequent periods unless the entity failed to use, or misused, information that:
(a) was available when financial statements for those periods were authorised for issue;
and
(b) could reasonably be expected to have been obtained and taken into account in the
preparation of those financial statements.37
79 To assess whether a cumulative error has become material to the current‑period financial
statements, an entity considers whether, in the current period:
(a) the entity’s circumstances have changed, leading to a different materiality
assessment for the current period; or
(b) further accumulation of a current‑period error onto the cumulative error has occurred.

37
See paragraph 5 of HKAS 8.

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80 An entity must correct cumulative errors if they have become material to the current‑period
financial statements.

Example O—current‑period assessment of cumulative errors

Background
An entity, three years ago, purchased a plant. The plant has a useful life of 50 years and
a residual value amounting to 20 per cent of the plant cost. The entity started to use the
plant three years ago, but has not recognised any depreciation for it (cumulative error). In
each prior period, the entity assessed the error of not depreciating its plant as being
individually and cumulatively immaterial to the financial statements for that period. There
is no indication that the materiality judgements of prior periods were wrong.
In the current period, the entity started depreciating the plant.
In the same period, the entity experienced a significant reduction in profitability (the type
of circumstance referred to in paragraph 79(a) of the Practice Statement).
Application
When making its materiality judgements in the preparation of the current-period financial
statements, the entity concluded that the cumulative error was material to the current-
period financial statements.
In this scenario, the entity does not need to revisit the materiality assessments it made in
prior periods. However, because in the current period the cumulative error has become
material to the current-period financial statements, the entity must apply the requirements
in HKAS 8 to correct it.

Information about covenants

81 An entity assesses the materiality of information about the existence and terms of a loan
agreement clause (covenant), or of a covenant breach, to decide whether to provide
information related to the covenant in the financial statements. This assessment is made in
the same way as for other information, that is, by considering whether that information could
reasonably be expected to influence decisions that its primary users make on the basis of the
entity’s financial statements (see ‘A four-step materiality process’, from paragraph 33).
82 In particular, when a covenant exists, an entity considers both:
(a) the consequences of a breach occurring, that is, the impact a covenant breach would
have on the entity’s financial position, financial performance and cash flows. If those
consequences would affect the entity’s financial position, financial performance or
cash flows in a way that could reasonably be expected to influence primary users’
decisions, then the information about the existence of the covenant and its terms is
likely to be material. Conversely, if the consequences of a covenant breach would not
affect the entity’s financial position, financial performance or cash flows in such a
way, then disclosures about the covenant might not be needed.
(b) the likelihood of a covenant breach occurring. The more likely it is that a covenant
breach would occur, the more likely it is that information about the existence and
terms of the covenant would be material.
83 In assessing whether information about a covenant is material, a combination of the
considerations in paragraph 82(a)–82(b) applies. Information about a covenant for which the
consequences of a breach would affect an entity’s financial position, financial performance or
cash flows in a way that could reasonably be expected to influence primary users’ decisions,
but for which there is only a remote likelihood of the breach occurring, is not material.

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Example P—assessing whether information about covenants is material

Background
An entity has rapidly grown over the past five years and recently suffered some liquidity
problems. A long-term loan was granted to the entity in the current reporting period. The
loan agreement includes a clause that requires the entity to maintain a ratio of debt to
equity below a specified threshold, to be measured at each reporting date (the covenant).
According to the loan agreement, the debt-to-equity ratio has to be calculated on the
basis of debt and equity figures as presented in the entity’s HKFRS financial statements.
If the entity breaches the covenant, the entire loan becomes payable on demand. The
disclosure of covenant terms in an entity’s financial statements is not required by any
local laws or regulations.
Application
Paragraph 31 of HKFRS 7 Financial Instruments: Disclosures requires an entity to
disclose information that enables users of its financial statements to evaluate the nature
and extent of risk arising from financial instruments to which the entity is exposed at the
end of the reporting period.
Paragraph 76ZA of HKAS 1 requires an entity to disclose, in specified circumstances,
information in the notes that enables users of financial statements to understand the risk
that non-current liabilities with covenants could become repayable within twelve months
after the reporting period.
In the preparation of its financial statements, the entity assesses whether information
about the existence of the covenant and its terms is material information, considering
both the consequences and the likelihood of a breach occurring.
In these circumstances, the entity concluded that, considering its recent liquidity problem,
any acceleration of the long-term loan repayment plan (the consequence of the covenant
breach occurring) would affect the entity’s financial position and cash flows in a way that
could reasonably be expected to influence primary users’ decisions.
The entity also considered the likelihood of a breach occurring.
Scenario 1—the lender defined the covenant threshold on the basis of the three-
year business plan prepared by the entity, adding a 10 per cent tolerance to the
forecast figures
In this scenario, even though the entity has historically met its past business plans, it
assessed the likelihood of a breach occurring as higher than remote. Therefore,
information about the existence of the covenant and its terms was assessed as material
and disclosed in the entity’s financial statements.
Scenario 2—the lender defined the covenant threshold on the basis of the three-
year business plan prepared by the entity, adding a 200 per cent tolerance to the
forecast figures
In this scenario, the entity assessed the likelihood of a breach occurring as remote, on the
basis of its historical track record of meeting its past business plans and the magnitude of
the tolerance included in the covenant threshold. Therefore, although the consequences
of the covenant breach would affect the entity’s financial position and cash flows in a way
that could reasonably be expected to influence primary users’ decisions, the entity
concluded that information about the existence of the covenant and its terms was not
material.

Materiality judgements for interim reporting

84 An entity makes materiality judgements in preparing both annual financial statements and
interim financial reports prepared in accordance with HKAS 34 Interim Financial Reporting. In
either case, the entity could apply the materiality process described in paragraphs 29–65. For
its interim financial report, the entity considers the same materiality factors as in its annual
assessment. However, it takes into consideration that the time period and the purpose of an
interim financial report differ from those of the annual financial statements.

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85 In making materiality judgements on its interim financial report, an entity focuses on the period
covered by that report, that is:
(a) it assesses whether information in the interim financial report is material in relation to
the interim period financial data, not annual data.38
(b) it applies the materiality factors on the basis of both the current interim period data
and also, whenever there is more than one interim period (eg in the case of quarterly
reporting), the data for the current financial year to date.39
(c) it may consider whether to provide in the interim financial report information that is
expected to be material to the annual financial statements. However, information that
is expected to be material to the annual financial statements need not be provided in
the interim financial report if it is not material to the interim financial report.

Example Q—information that is expected to be material to the annual financial

statements
Background
An entity sells mainly standardised products to private customers in its home market. In
the first half of the reporting period, 98 per cent of the entity’s revenue was generated by
sales of Product X. The remaining revenue was principally derived from a pilot sale of a
new product line—Product Y—that the entity planned to launch in the third quarter of the
year. The entity expects revenue from Product Y to increase significantly by the end of
the annual reporting period, so that Product Y will provide approximately 20 per cent of
the entity’s revenue for the full annual period.
Application
Paragraph 114 of HKFRS 15 Revenue from Contracts with Customers requires an entity
to disaggregate revenue recognised from contracts into categories that depict how the
nature, amount, timing and uncertainty of revenue and cash flows are affected by
economic factors.
The entity did not identify any qualitative factors that made the amount of revenues from
Product Y material to the interim period.
In these circumstances, the entity concluded that the information about disaggregation of
revenue by product lines was not material to the interim financial report and did not
disclose it. In the preparation of the interim financial report, the entity is not required to
disaggregate its revenue by product lines even if a greater level of disaggregation is
expected to be required for the subsequent annual financial statements. In other words,
although the entity expects that revenue by product lines will be material information for
the annual financial statements, that fact does not influence the materiality assessment in
the preparation of the entity’s interim financial report.

86 Similarly, an entity may consider whether to provide information in the annual financial
statements that is only material to the interim financial report. However, if information is
material to the interim financial report, it need not be presented or disclosed subsequently in
the annual financial statements if it is not material to those statements.

38
See paragraphs 23 and 25 of HKAS 34 Interim Financial Reporting.
39
Paragraph 20 of HKAS 34 requires an entity to include in the interim financial report the statements of profit or loss and
other comprehensive income for both periods, the current interim period and the current financial year to date.

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Example R—information that is only material to the interim financial report

Background
An entity has identified measures of its profitability and cash flows as the measures of
great interest to the primary users of its financial statements. During the interim period,
the entity constructed a new chemical handling process to enable it to comply with
environmental requirements for the production and storage of dangerous chemicals. Such
an item of property, plant and equipment (PP&E) qualifies for recognition as an asset in
accordance with paragraph 11 of HKAS 16 Property, Plant and Equipment.
Application
Paragraph 74(b) of HKAS 16 requires the disclosure of the expenditure recognised in the
carrying amount of an item of PP&E in the course of its construction.
In the preparation of the interim financial report, the entity assessed, both from a
quantitative and qualitative perspective, the information about expenditure recognised in
the carrying amount of the chemical handling process, concluded that information was
material to the interim financial report and disclosed it.
The entity incurred no further expenditure related to the chemical handling process in the
second half of the annual reporting period. In the preparation of its annual financial
statements, the entity assessed the expenditure recognised in the carrying amount of the
chemical handling process against its annual profitability and cash flow measures and
concluded that this information was not material to the annual financial statements. In
reaching that conclusion, the entity did not identify any qualitative factors leading to a
different assessment.
The entity is not required to disclose information about the expenditure recognised in the
carrying amount of its chemical handling process in its annual financial statements.

87 In assessing materiality, an entity also considers the purpose of interim financial reports, which
differs from the purpose of annual financial statements. An interim financial report is intended
to provide an update on the latest complete set of annual financial statements.40 Information
that is material to the interim period, but was already provided in the latest annual financial
statements, does not need to be reproduced in the interim financial report, unless something
new occurs or an update is needed.41

Interim reporting estimates

88 When an entity concludes that information about estimation uncertainty is material, the entity
needs to disclose that information. Measurements included in interim financial reports often
rely more on estimates than measurements included in the annual financial statements.42 That
fact does not, in itself, make the estimated measurements material. Nevertheless, relying on
estimates for interim financial data to a greater extent than for annual financial data might
result in more disclosures about such uncertainties being material, and thus being provided in
the interim financial report, compared with the annual financial statements.

40
See paragraph 6 of HKAS 34.
41
See paragraphs 15–15A of HKAS 34.
42
See paragraph 41 of HKAS 34.

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Information about accounting policies

88A Paragraph 117 of HKAS 1 requires an entity to disclose material accounting policy information.
88B Accounting policy information relating to immaterial transactions, other events or conditions is
immaterial and need not be disclosed. Accounting policy information may nevertheless be
material because of the nature of the related transactions, other events or conditions, even if
the amounts are immaterial. An entity is required to disclose accounting policy information
relating to material transactions, other events or conditions if that information is material to the
financial statements.
88C In assessing whether accounting policy information is material to its financial statements, an
entity considers whether users of the entity’s financial statements would need that information
to understand other material information in the financial statements. An entity makes this
assessment in the same way it assesses other information: by considering qualitative and
quantitative factors, as described in paragraphs 44–55. Diagram 2 illustrates how an entity
assesses whether accounting policy information is material and, therefore, shall be disclosed.

Diagram 2—determining whether accounting policy information is material

Is the transaction, other event or condition to which the accounting policy information relates
material in size or nature, or a combination of both?

No Yes

Accounting policy information Is the accounting policy information that

that relates to immaterial relates to a material transaction, other event
transactions, other events or or condition itself material to the financial
conditions is immaterial and statements (paragraph 117B of HKAS 1)?
need not be disclosed
(paragraphs 117A and 117D of
HKAS 1).

No Yes

Immaterial Material
accounting policy accounting policy
information that information shall
relates to material be disclosed
transactions, other (paragraphs 117
events or conditions and 117C of
need not be disclosed HKAS 1).
(paragraphs 117A
and 117D of HKAS
1).

Note: an entity’s conclusion that accounting policy information is immaterial does not affect the
related disclosure requirements set out in other HKFRS Standards (paragraph 117E of HKAS 1).

88D Paragraph 117B of HKAS 1 includes examples of circumstances in which an entity is likely to
consider accounting policy information to be material to its financial statements. The list is not
exhaustive, but provides guidance on when an entity would normally consider accounting
policy information to be material.

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88E Paragraph 117C of HKAS 1 describes the type of material accounting policy information that
users of financial statements find most useful. Users generally find information about the
characteristics of an entity’s transactions, other events or conditions—entity-specific
information—more useful than disclosures that only include standardised information, or
information that duplicates or summarises the requirements of the HKFRS Standards. Entity-
specific accounting policy information is particularly useful when that information relates to an
area for which an entity has exercised judgement—for example, when an entity applies an
HKFRS Standard differently from similar entities in the same industry.
88F Although entity-specific accounting policy information is generally more useful, material
accounting policy information could sometimes include information that is standardised, or that
duplicates or summarises the requirements of the HKFRS Standards. Such information may
be material if, for example:
(a) users of the entity’s financial statements need that information to understand other
material information provided in the financial statements. Such a scenario might arise
when an entity applying HKFRS 9 Financial Instruments has no choice regarding the
classification of its financial instruments. In such scenarios, users of that entity’s
financial statements may only be able to understand how the entity has accounted
for its material financial instruments if users also understand how the entity has
applied the requirements of HKFRS 9 to its financial instruments.
(b) an entity reports in a jurisdiction in which entities also report applying local accounting
standards.
(c) the accounting required by the HKFRS Standards is complex, and users of financial
statements need to understand the required accounting. Such a scenario might arise
when an entity accounts for a material class of transactions, other events or
conditions by applying more than one HKFRS Standard.
88G Paragraph 117D of HKAS 1 states that if an entity discloses immaterial accounting policy
information, such information shall not obscure material information. Paragraphs 56–59
provide guidance about how to communicate information clearly and concisely in the financial
statements.

Example S—making materiality judgements and focusing on entity-specific

information while avoiding standardised (boilerplate) accounting policy
information

Background
An entity operates within the telecommunications industry. It has entered into contracts
with retail customers to deliver mobile phone handsets and data services. In a typical
contract, the entity provides a customer with a handset and data services over three
years. The entity applies HKFRS 15 Revenue from Contracts with Customers and
recognises revenue when, or as, the entity satisfies its performance obligations in line
with the terms of the contract.

The entity has identified two performance obligations and related considerations:

(a) the handset—the customer makes monthly payments for the handset over three
years; and
(b) data—the customer pays a fixed monthly charge to use a specified monthly
amount of data over three years.

For the handset, the entity concludes that it should recognise revenue when it satisfies
the performance obligation (when it provides the handset to the customer). For the
provision of data, the entity concludes that it should recognise revenue as it satisfies the
continued…

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…continued

performance obligation (as the entity provides data services to the customer over the
three-year life of the contract).

The entity notes that, in accounting for revenue it has made judgements about:

(a) the allocation of the transaction price to the performance obligations; and
(b) the timing of satisfaction of the performance obligations.
The entity has concluded that revenue generated from these contracts is material to the
reporting period.

Application
The entity notes that for contracts of this type it applies separate accounting policies for
two sources of revenue, namely revenue from:

(a) the sale of handsets; and

(b) the provision of data services.

Having identified revenue from contracts of this type as material to the financial
statements, the entity assesses whether accounting policy information for revenue from
these contracts is, in fact, material.

The entity evaluates the effect of disclosing the accounting policy information by
considering the presence of qualitative factors. The entity noted that its revenue
recognition accounting policies:

(a) were unchanged during the reporting period;

(b) were not chosen from accounting policy options available in the HKFRS
Standards;
(c) were not developed in accordance with HKAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors in the absence of an HKFRS Standard that
specifically applies; and
(d) are not so complex that primary users will be unable to understand the related
revenue transactions without standardised descriptions of the requirements of
HKFRS 15.

However, some of the entity’s revenue recognition accounting policies relate to an area
for which the entity has made significant judgements in applying its accounting policies—
for example, in deciding how to allocate the transaction price to the performance
obligations, and the timing of revenue recognition.

The entity considers that, in addition to disclosing the information required by paragraphs
123–126 of HKFRS 15 about the significant judgements made in applying HKFRS 15,
primary users of its financial statements are likely to need to understand related
accounting policy information. Consequently, the entity concludes that such accounting
policy information could reasonably be expected to influence the decisions of the primary
users of its financial statements. For example, understanding:
continued…

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…continued

(a) how the entity allocates the transaction price to its performance obligations is
likely to help users understand how each component of the transaction
contributes to the entity’s revenue and cash flows; and
(b) that some revenue is recognised at a point in time and some is recognised over
time is likely to help users understand how reported cash flows relate to
revenue.

The entity also notes that the judgements it made are specific to the entity. Consequently,
material accounting policy information would include information about how the entity has
applied the requirements of HKFRS 15 to its specific circumstances.

The entity, therefore, assesses that accounting policy information about revenue
recognition is material and should be disclosed. Such disclosure would include
information about how the entity allocates the transaction price to its performance
obligations and when the entity recognises revenue.

Example T—making materiality judgements on accounting policy information that

only duplicates requirements in the HKFRS Standards

Background
Property, plant and equipment are material to an entity’s financial statements.

The entity has no intangible assets or goodwill and has not recognised an impairment
loss on its property, plant or equipment in either the current or comparative reporting
periods.

In previous reporting periods, the entity disclosed accounting policy information relating to
impairment of non-current assets which duplicates the requirements of HKAS 36
Impairment of Assets and provides no entity-specific information. The entity disclosed
that:

The carrying amounts of the group’s intangible assets and its property, plant and
equipment are reviewed at each reporting date to determine whether there is any
indication of impairment. If any such indication exists, the asset’s recoverable
amount is estimated. For goodwill and intangibles with an indefinite useful life,
the recoverable amount is estimated at least annually.
An impairment loss is recognised in the statement of profit or loss whenever the
carrying amount of an asset or its cash-generating unit exceeds its recoverable
amount.
The recoverable amount of assets is the greater of their fair value less costs to
sell and their value in use. In measuring value in use, estimated future cash
flows are discounted to present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to
the asset. For an asset that does not generate largely independent cash inflows,
the recoverable amount is determined for the cash-generating unit to which the
asset belongs.
Impairment losses recognised in respect of cash-generating units are allocated
first to reduce the carrying amount of any goodwill allocated to that cash-
generating unit and then to reduce the carrying amount of the other assets in the
unit on a pro rata basis.
continued…

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…continued

An impairment loss in respect of goodwill is not subsequently reversed. For other

assets, an impairment loss is reversed if there has been a change in the
estimates used to determine the recoverable amount, but only to the extent that
the new carrying amount does not exceed the carrying amount that would have

Application
Having identified assets subject to impairment testing as being material to the financial
statements, the entity assesses whether the accounting policy information for impairment
is, in fact, material.

As part of its assessment, the entity considers that an impairment or a reversal of an

impairment had not occurred in the current or comparative reporting periods.
Consequently, accounting policy information about how the entity recognises and
allocates impairment losses is unlikely to be material to its primary users. Similarly,
because the entity has no intangible assets or goodwill, information about its accounting
policy for impairments of intangible assets and goodwill is unlikely to provide its primary
users with material information.

However, the entity’s impairment accounting policy relates to an area for which the entity
is required to make significant judgements or assumptions, as described in paragraphs
122 and 125 of HKAS 1. Given the entity’s specific circumstances, it concludes that
information about its significant judgements and assumptions related to its impairment
assessments could reasonably be expected to influence the decisions of the primary
users of the entity’s financial statements. The entity notes that its disclosures about
significant judgements and assumptions already include information about the significant
judgements and assumptions used in its impairment assessments.

The entity decides that the primary users of its financial statements would be unlikely to
need to understand the recognition and measurement requirements of HKAS 36 to
understand related information in the financial statements.

Consequently, the entity concludes that disclosing a summary of the requirements in

HKAS 36 in a separate accounting policy for impairment would not provide information
that could reasonably be expected to influence decisions made by the primary users of its
financial statements. Instead, the entity discloses material accounting policy information
related to the significant judgements and assumptions the entity has applied in its
impairment assessments elsewhere in the financial statements.

Although the entity assesses some accounting policy information for impairments of
assets as immaterial, the entity still assesses whether other disclosure requirements of
HKAS 36 provide material information that should be disclosed.

Application date
89 This Practice Statement does not change any requirements in HKFRS Standards or introduce
any new requirements. An entity that chooses to apply the guidance in the Practice Statement
is permitted to apply it to financial statements prepared from 22 March 2021.

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Appendix
References to the Conceptual Framework for Financial Reporting and
HKFRS Standards

Extracts from the Conceptual Framework for Financial Reporting

Paragraph 1.2
Referred to in paragraphs 7 and 17 of the Practice Statement
The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in making
decisions relating to providing resources to the entity. Those decisions involve decisions about:
(a) buying, selling or holding equity and debt instruments;
(b) providing or settling loans and other forms of credit; or
(c) exercising rights to vote on, or otherwise influence, management’s actions that affect the use
of the entity’s economic resources.
Paragraph 1.3
Referred to in paragraph 18 of the Practice Statement
The decisions described in paragraph 1.2 depend on the returns that existing and potential investors,
lenders and other creditors expect, for example, dividends, principal and interest payments or market
price increases. Investors’, lenders’ and other creditors’ expectations about returns depend on their
assessment of the amount, timing and uncertainty of (the prospects for) future net cash inflows to the
entity and on their assessment of management’s stewardship of the entity’s economic resources.
Existing and potential investors, lenders and other creditors need information to help them make those
assessments.
Paragraph 1.4
Referred to in paragraphs 19 and 38 of the Practice Statement
To make the assessments described in paragraph 1.3, existing and potential investors, lenders and
other creditors need information about:
(a) the economic resources of the entity, claims against the entity and changes in those resources
and claims (see paragraphs 1.12–1.21); and
(b) how efficiently and effectively the entity’s management and governing board have discharged
their responsibilities to use the entity’s economic resources (see paragraphs 1.22–1.23).
Paragraph 1.5
Referred to in paragraph 13 of the Practice Statement
Many existing and potential investors, lenders and other creditors cannot require reporting entities to
provide information directly to them and must rely on general purpose financial reports for much of the
financial information they need. Consequently, they are the primary users to whom general purpose
financial reports are directed.
Paragraph 1.6
Referred to in paragraph 21 of the Practice Statement
However, general purpose financial reports do not and cannot provide all of the information that existing
and potential investors, lenders and other creditors need. Those users need to consider pertinent
information from other sources, for example, general economic conditions and expectations, political
events and political climate, and industry and company outlooks.

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Paragraph 1.8
Referred to in paragraph 36 of the Practice Statement
Individual primary users have different, and possibly conflicting, information needs and desires. The
HKICPA, in developing Standards and Accounting Guidelines, will seek to provide the information set
that will meet the needs of the maximum number of primary users. However, focusing on common
information needs does not prevent the reporting entity from including additional information that is
most useful to a particular subset of primary users.
Paragraph 1.9
Referred to in paragraph 13 of the Practice Statement
The management of a reporting entity is also interested in financial information about the entity.
However, management need not rely on general purpose financial reports because it is able to obtain
the financial information it needs internally.
Paragraph 1.10
Referred to in paragraph 13 of the Practice Statement
Other parties, such as regulators and members of the public other than investors, lenders and other
creditors, may also find general purpose financial reports useful. However, those reports are not
primarily directed to these other groups.
Paragraph 2.7
Referred to in paragraph 20 of the Practice Statement
Financial information is capable of making a difference in decisions if it has predictive value,
confirmatory value or both.
Paragraph 2.11
Referred to in paragraph 5 of the Practice Statement
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence
decisions that the primary users of general purpose financial reports (see paragraph 1.5) make on the
basis of those reports, which provide financial information about a specific reporting entity. In other
words, materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both,
of the items to which the information relates in the context of an individual entity’s financial report.
Consequently, the HKICPA cannot specify a uniform quantitative threshold for materiality or
predetermine what could be material in a particular situation.
Paragraph 2.34
Referred to in paragraph 56 of the Practice Statement
Classifying, characterising and presenting information clearly and concisely makes it understandable.
Paragraph 2.36
Referred to in paragraph 15 of the Practice Statement
Financial reports are prepared for users who have a reasonable knowledge of business and economic
activities and who review and analyse the information diligently. At times, even well-informed and
diligent users may need to seek the aid of an adviser to understand information about complex
economic phenomena.

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Extracts from HKAS 1 Presentation of Financial Statements

Paragraph 7
Referred to in paragraphs 5, 41 and 60 of the Practice Statement
Material:
Information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the primary users of general purpose financial
statements make on the basis of those financial statements which provide financial
information about a specific reporting entity.
Materiality depends on the nature or magnitude of information, or both. An entity assesses
whether information, either individually or in combination with other information, is material in
the context of its financial statements taken as a whole.
Paragraph 7
Referred to in paragraph 6 of the Practice Statement
Assessing whether information could reasonably be expected to influence decisions made by
the primary users of a specific reporting entity’s general purpose financial statements requires
an entity to consider the characteristics of those users while also considering the entity’s own
circumstances. […] At times, even well informed and diligent users may need to seek the aid
of an adviser to understand information about complex economic phenomena.
Paragraph 15
Referred to in paragraph 62 of the Practice Statement
Financial statements shall present a true and fair view of the financial position, financial
performance and cash flows of an entity. True and fair view requires the faithful
representation of the effects of transactions, other events and conditions in accordance
with the definitions and recognition criteria for assets, liabilities, income and expenses
set out in the Conceptual Framework for Financial Reporting (Conceptual Framework).
The application of HKFRSs, with additional disclosure when necessary, is presumed to
result in financial statements that achieve a true and fair view.
Paragraph 17
Referred to in paragraph 10 of the Practice Statement
In virtually all circumstances, an entity achieves a true and fair view by compliance with
applicable HKFRSs. A true and fair view also requires an entity:
(a) to select and apply accounting policies in accordance with HKAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors. HKAS 8 sets out a hierarchy
of authoritative guidance that management considers in the absence of an HKFRS
that specifically applies to an item.
(b) to present information, including accounting policies, in a manner that provides
relevant, reliable, comparable and understandable information.
(c) to provide additional disclosures when compliance with the specific requirements in
HKFRSs is insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the entity’s financial position and
financial performance.
Paragraph 29
Referred to in paragraph 43 of the Practice Statement
An entity shall present separately each material class of similar items. An entity shall
present separately items of a dissimilar nature or function unless they are immaterial.

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Paragraph 30A
Referred to in paragraphs 28, 57 and 69 of the Practice Statement
When applying this and other HKFRSs an entity shall decide, taking into consideration all
relevant facts and circumstances, how it aggregates information in the financial statements,
which include the notes. An entity shall not reduce the understandability of its financial
statements by obscuring material information with immaterial information or by aggregating
material items that have different natures or functions.
Paragraph 31
Referred to in paragraph 10 of the Practice Statement
Some HKFRSs specify information that is required to be included in the financial statements,
which include the notes. An entity need not provide a specific disclosure required by a HKFRS
if the information resulting from that disclosure is not material. This is the case even if the
HKFRS contains a list of specific requirements or describes them as minimum requirements.
An entity shall also consider whether to provide additional disclosures when compliance with
the specific requirements in HKFRS is insufficient to enable users of financial statements to
understand the impact of particular transactions, other events and conditions on the entity’s
financial position and financial performance.
Paragraph 38
Referred to in paragraphs 67 and 70 of the Practice Statement
Except when HKFRSs permit or require otherwise, an entity shall present comparative
information in respect of the preceding period for all amounts reported in the current
period’s financial statements. An entity shall include comparative information for
narrative and descriptive information if it is relevant to understanding the current
period’s financial statements.
Paragraph 38A
Referred to in paragraph 67 of the Practice Statement
An entity shall present, as a minimum, two statements of financial position, two
statements of profit or loss and other comprehensive income, two separate statements
of profit or loss (if presented), two statements of cash flows and two statements of
changes in equity, and related notes.
Paragraph 38C
Referred to in paragraph 69 of the Practice Statement
An entity may present comparative information in addition to the minimum comparative
financial statements required by HKFRSs, as long as that information is prepared in
accordance with HKFRSs. This comparative information may consist of one or more
statements referred to in paragraph 10, but need not comprise a complete set of financial
statements. When this is the case, the entity shall present related note information for those
additional statements.
Paragraph 117
Referred to in paragraphs 88A and 88C of the Practice Statement
An entity shall disclose material accounting policy information (see paragraph 7).
Accounting policy information is material if, when considered together with other
information included in an entity’s financial statements, it can reasonably be expected
to influence decisions that the primary users of general purpose financial statements
make on the basis of those financial statements.

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Paragraph 117A
Referred to in paragraph 88C of the Practice Statement
Accounting policy information that relates to immaterial transactions, other events or
conditions is immaterial and need not be disclosed. Accounting policy information may
nevertheless be material because of the nature of the related transactions, other events or
conditions, even if the amounts are immaterial. However, not all accounting policy information
relating to material transactions, other events or conditions is itself material.
Paragraph 117B
Referred to in paragraphs 88C and 88D of the Practice Statement
Accounting policy information is expected to be material if users of an entity’s financial
statements would need it to understand other material information in the financial statements.
For example, an entity is likely to consider accounting policy information material to its financial
statements if that information relates to material transactions, other events or conditions and:
(a) the entity changed its accounting policy during the reporting period and this change
resulted in a material change to the information in the financial statements;
(b) the entity chose the accounting policy from one or more options permitted by
HKFRSs—such a situation could arise if the entity chose to measure investment
property at historical cost rather than fair value;
(c) the accounting policy was developed in accordance with HKAS 8 in the absence of a
HKFRS that specifically applies;
(d) the accounting policy relates to an area for which an entity is required to make
significant judgements or assumptions in applying an accounting policy, and the entity
discloses those judgements or assumptions in accordance with paragraphs 122 and
125; or
(e) the accounting required for them is complex and users of the entity’s financial
statements would otherwise not understand those material transactions, other events
or conditions—such a situation could arise if an entity applies more than one HKFRS
to a class of material transactions.
Paragraph 117C
Referred to in paragraphs 88C and 88E of the Practice Statement
Accounting policy information that focuses on how an entity has applied the requirements of
the HKFRSs to its own circumstances provides entity-specific information that is more useful
to users of financial statements than standardised information, or information that only
duplicates or summarises the requirements of the HKFRSs.
Paragraph 117D
Referred to in paragraphs 88C and 88G of the Practice Statement
If an entity discloses immaterial accounting policy information, such information shall not
obscure material accounting policy information.
Paragraph 117E
Referred to in paragraph 88C of the Practice Statement
An entity’s conclusion that accounting policy information is immaterial does not affect the
related disclosure requirements set out in other HKFRSs.

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Paragraph BC30F of the Basis for Conclusions

Referred to in paragraphs 28 and 69 of the Practice Statement
Paragraph 30A was added to IAS 1 to highlight that when an entity decides how it aggregates
information in the financial statements, it should take into consideration all relevant facts and
circumstances. Paragraph 30A emphasises that an entity should not reduce the
understandability of its financial statements by providing immaterial information that obscures
the material information in financial statements or by aggregating material items that have
different natures or functions. Obscuring material information with immaterial information in
financial statements makes the material information less visible and therefore makes the
financial statements less understandable. The amendments do not actually prohibit entities
from disclosing immaterial information, because the Board thinks that such a requirement
would not be operational; however, the amendments emphasise that disclosure should not
result in material information being obscured.

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Extracts from HKAS 8 Accounting Policies, Changes in Accounting

Estimates and Errors
Paragraph 5
Referred to in paragraphs 72 and 78 of the Practice Statement
Prior period errors are omissions from, and misstatements in, the entity's financial
statements for one or more prior periods arising from a failure to use, or misuse of,
reliable information that:
(a) was available when financial statements for those periods were authorised for
issue; and
(b) could reasonably be expected to have been obtained and taken into account in
the preparation and presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying
accounting policies, oversights or misinterpretations of facts, and fraud.
Paragraph 8
Referred to in paragraph 8 of the Practice Statement
HKFRSs set out accounting policies that the HKICPA has concluded result in financial
statements containing relevant and reliable information about the transactions, other events
and conditions to which they apply. Those policies need not be applied when the effect of
applying them is immaterial. However, it is inappropriate to make, or leave uncorrected,
immaterial departures from HKFRSs to achieve a particular presentation of an entity’s financial
position, financial performance or cash flows.
Paragraph 41
Referred to in paragraph 73 of the Practice Statement
Errors can arise in respect of the recognition, measurement, presentation or disclosure of
elements of financial statements. Financial statements do not comply with HKFRSs if they
contain either material errors or immaterial errors made intentionally to achieve a particular
presentation of an entity's financial position, financial performance or cash flows. Potential
current period errors discovered in that period are corrected before the financial statements
are authorised for issue. However, material errors are sometimes not discovered until a
subsequent period, and these prior period errors are corrected in the comparative information
presented in the financial statements for that subsequent period (see paragraphs 42–47).

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Extracts from HKAS 34 Interim Financial Reporting

Paragraph 6
Referred to in paragraph 87 of the Practice Statement
In the interest of timeliness and cost considerations and to avoid repetition of information
previously reported, an entity may be required to or may elect to provide less information at
interim dates as compared with its annual financial statements. This Standard defines the
minimum content of an interim financial report as including condensed financial statements
and selected explanatory notes. The interim financial report is intended to provide an update
on the latest complete set of annual financial statements. Accordingly, it focuses on new
activities, events, and circumstances and does not duplicate information previously reported.
Paragraph 15
Referred to in paragraph 87 of the Practice Statement
An entity shall include in its interim financial report an explanation of events and transactions
that are significant to an understanding of the changes in financial position and performance
of the entity since the end of the last annual reporting period. Information disclosed in relation
to those events and transactions shall update the relevant information presented in the most
recent annual financial report.
Paragraph 15A
Referred to in paragraph 87 of the Practice Statement
A user of an entity’s interim financial report will have access to the most recent annual financial
report of that entity. Therefore, it is unnecessary for the notes to an interim financial report to
provide relatively insignificant updates to the information that was reported in the notes in the
most recent annual financial report.
Paragraph 20
Referred to in paragraph 85 of the Practice Statement
Interim reports shall include interim financial statements (condensed or complete) for
periods as follows:
(a) statement of financial position as of the end of the current interim period and a
comparative statement of financial position as of the end of the immediately
preceding financial year.
(b) statements of profit or loss and other comprehensive income for the current
interim period and cumulatively for the current financial year to date, with
comparative statements of profit or loss and other comprehensive income for
the comparable interim periods (current and year‑to‑date) of the immediately
preceding financial year. As permitted by HKAS 1 (as amended in 2011), an
interim report may present for each period a statement or statements of profit
or loss and other comprehensive income.
(c) statement of changes in equity cumulatively for the current financial year to
date, with a comparative statement for the comparable year‑to‑date period of
the immediately preceding financial year.
(d) statement of cash flows cumulatively for the current financial year to date, with
a comparative statement for the comparable year‑to‑date period of the
immediately preceding financial year.
Paragraph 23
Referred to in paragraph 85 of the Practice Statement
In deciding how to recognise, measure, classify, or disclose an item for interim financial
reporting purposes, materiality shall be assessed in relation to the interim period
financial data. In making assessments of materiality, it shall be recognised that interim

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measurements may rely on estimates to a greater extent than measurements of annual

financial data.
Paragraph 25
Referred to in paragraph 85 of the Practice Statement
While judgement is always required in assessing materiality, this Standard bases the
recognition and disclosure decision on data for the interim period by itself for reasons of
understandability of the interim figures. Thus, for example, unusual items, changes in
accounting policies or estimates, and errors are recognised and disclosed on the basis of
materiality in relation to interim period data to avoid misleading inferences that might result
from non‑disclosure. The overriding goal is to ensure that an interim financial report includes
all information that is relevant to understanding an entity’s financial position and performance
during the interim period.
Paragraph 41
Referred to in paragraph 88 of the Practice Statement
The measurement procedures to be followed in an interim financial report shall be
designed to ensure that the resulting information is reliable and that all material
financial information that is relevant to an understanding of the financial position or
performance of the entity is appropriately disclosed. While measurements in both
annual and interim financial reports are often based on reasonable estimates, the
preparation of interim financial reports generally will require a greater use of estimation
methods than annual financial reports.

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BASIS FOR CONCLUSIONS ON

IFRS Practice Statement 2 Making Materiality Judgements
HKFRS Practice Statement 2 is based on IFRS Practice Statement 2 Making Materiality Judgements
(Practice Statement). In approving HKFRS Practice Statement 2, the Financial Reporting Standards
Committee of the Hong Kong Institute of Certified Public Accountants considered and agreed with the
IASB’s Basis for Conclusions on the Practice Statement. Accordingly, there are no significant
differences between HKFRS Practice Statement 2 and the Practice Statement. The IASB’s Basis for
Conclusions is reproduced below. The paragraph numbers of the Practice Statement referred to below
generally correspond with those in HKFRS Practice Statement 2.
This Basis for Conclusions accompanies, but is not part of, the IFRS Practice Statement 2 Making
Materiality Judgements (Practice Statement). It summarises the considerations of the International
Accounting Standards Board (Board) when developing the Practice Statement. Individual Board
members gave greater weight to some factors than to others.

Background
BC1 The Board was informed at the Discussion Forum on Financial Reporting Disclosure in January
2013, through feedback on the 2014 Exposure Draft of proposed amendments
to IAS 1 Presentation of Financial Statements and from other sources, that entities experience
difficulties making materiality judgements when preparing financial statements. Some entities
are unsure how to make materiality judgements and tend to use disclosure requirements in
IFRS Standards as if they were items on a checklist, rather than using judgement when
deciding what information to provide in financial statements. Some stakeholders stated that
these difficulties and practices contribute to a disclosure problem—namely, entities provide too
much irrelevant information and not enough relevant information in their financial statements.
BC2 Some stakeholders suggested that one of the factors contributing to these difficulties was the
lack of guidance on materiality in IFRS Standards, particularly on how entities should make
materiality judgements about information disclosed in the notes to the financial statements. In
the light of this feedback, the Board decided to provide further guidance. The aim of the Board
is to promote a behavioural change in the way entities prepare their financial statements,
encouraging a greater exercise of judgement when determining what information to include or
not to include in those statements.
BC3 In October 2015, the Board published the Exposure Draft IFRS Practice Statement Application
of Materiality to Financial Statements (Practice Statement ED). The Board developed the
Practice Statement ED after considering the input obtained from outreach and consultations
with the IFRS Advisory Council; the Accounting Standards Advisory Forum (ASAF); the World
Standard‑Setters; the Global Preparers Forum (GPF); the Capital Markets Advisory Committee
(CMAC); representatives of the International Auditing and Assurance Standards Board and the
International Organization of Securities Commissions; and a number of other accounting
professionals, academics and representatives of other regulatory bodies.1
BC4 The Board received 95 comment letters in response to the Practice Statement ED. The Board
also conducted outreach on the proposals in the Practice Statement ED, including consultation
with the ASAF, the CMAC and the GPF. Responses to the Practice Statement ED indicated
widespread support for the Board to issue practical guidance on making materiality judgements
in the preparation of financial statements. The Board considered the input it received on the
Practice Statement ED when developing this Practice Statement.

1
The IFRS Advisory Council, the Accounting Standards Advisory Forum (ASAF), the Global Preparers Forum (GPF) and
the Capital Markets Advisory Committee (CMAC) are the Board’s advisory bodies. The World Standard‑Setters is a
meeting of accounting standard‑setters organised by the Board.

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Form of the guidance

BC5 The Practice Statement sets out non‑mandatory guidance with the aim of assisting entities in
making materiality judgements when preparing general purpose financial statements. Entities
applying IFRS Standards are not required to comply with the Practice Statement to state
compliance with those Standards. Nevertheless, the Board expects the Practice Statement to
help promote a greater understanding of the role of materiality in applying IFRS Standards and
of how judgement should be exercised to assess materiality in preparing financial statements.
The Board expects that better understanding of the role of materiality will ultimately make
financial statements more useful and easier to understand.
BC6 The Board decided to provide guidance on how to make materiality judgements in the form of
a non‑mandatory Practice Statement because:
(a) issuing mandatory requirements in a Standard could risk appearing prescriptive,
which could undermine the emphasis on entities applying their judgement in the
assessment of materiality; and
(b) issuing guidance as a separate non‑mandatory document, rather than as
non‑mandatory implementation guidance supporting a specific Standard, such as
IAS 1, would help to emphasise that the concept of materiality is pervasive throughout
IFRS Standards.
BC7 Moreover, the Board was told that adding mandatory requirements in a Standard could risk
creating conflicts with local legal or regulatory frameworks. Nevertheless, the Board observed
that even though some jurisdictions might have legal or regulatory requirements that interact
with IFRS materiality requirements, this should not result in a conflict with the guidance in the
Practice Statement, provided that those local requirements do not prevent an entity from
applying the requirements in IFRS Standards. No respondents to the Practice Statement ED
and no participants in the outreach organised by the Board reported such a circumstance.
BC8 Furthermore, this Practice Statement does not change any requirements in IFRS Standards or
introduce any new requirements. The Board decided that non‑mandatory status was more
appropriate.
BC9 Finally, the Board issued a Practice Statement rather than asking the IFRS Foundation staff to
develop educational material because a Practice Statement is subject to full due process,
including public consultation, and is more accessible than educational material.
BC10 Responses to the Practice Statement ED indicated widespread agreement with the
considerations that led the Board to include its guidance in a non‑mandatory Practice
Statement.

Scope
BC11 The objective of this Practice Statement is to provide entities with guidance on making
materiality judgements when preparing general purpose financial statements in accordance
with IFRS Standards. The Board discussed whether to broaden the audience of the Practice
Statement by also addressing it to other parties involved in financial reporting, but concluded
that the Practice Statement should only be addressed to those involved in the preparation of
the financial statements. The Board noted, however, that the Practice Statement is also likely
to help other parties, such as auditors, users of financial statements, regulators and enforcers,
understand the approach an entity follows in making materiality judgements when preparing
its financial statements.

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BC12 The Board discussed whether the Practice Statement should also be addressed to entities
applying the IFRS for SMEs® Standard. However, the IFRS for SMEs Standard is a separate
and stand‑alone accounting framework based on full IFRS Standards with modifications to
reflect cost‑benefit considerations specific to small and medium sized entities and the need of
users of the financial statements of such entities. The IFRS for SMEs Standard does not refer
to the concept of primary users as included in the Conceptual Framework for Financial
Reporting (Conceptual Framework) and does not include recent changes to full IFRS
Standards (eg that an entity shall not reduce the understandability of its financial statements
by obscuring material information with immaterial information). Therefore, the Board decided
that the Practice Statement is not intended for entities applying the IFRS for SMEs Standard.
The IFRS for SMEs Standard permits, but does not require, entities to refer to guidance
available in full IFRS Standards. Those entities may therefore refer to the guidance in the
Practice Statement in the same way they consider the requirements and guidance in full IFRS
Standards dealing with similar and related issues in developing and applying accounting
policies when the IFRS for SMEs Standard does not specifically address a transaction, other
event or condition.
BC13 Materiality is a general concept widely used for financial reporting and other purposes. For
example, auditors usually assess materiality when making judgements about the nature, timing
and extent of the work to be done to express an opinion as to whether the financial statements
are prepared, in all material respects, in accordance with an applicable financial reporting
framework. Some respondents to the Practice Statement ED noted that preparers and auditors
of financial statements assess materiality using a comparable approach—they both focus on
information that could reasonably be expected to influence decisions of the users of an entity’s
financial statements. The Board discussed whether to include in the Practice Statement a
reference to the assessment of materiality for auditing or other purposes, but decided to focus
its guidance on the preparation of financial statements only. Assessing materiality for purposes
other than the preparation of financial statements is beyond the scope of this Practice
Statement. Moreover, referring to different applications of the concept of materiality might
cause confusion.

General characteristics of materiality

Definition of material
BC14 The Board has discussed the definition of ‘material’ and whether to change or clarify that
definition in its Principles of Disclosure project. In September 2017, on the basis of those
discussions, the Board published the Exposure Draft Definition of Material (Proposed
amendments to IAS 1 and IAS 8) (Definition of Material ED). The Definition of Material ED
proposes refining the definition of material by incorporating the existing description of material
information in paragraph 7 of IAS 12 and emphasising the need to ensure material information
is not obscured, as described in paragraph 30A of IAS 1. IFRS Standards already include both
concepts; consequently, the Practice Statement includes these notions. The Board considered
whether to postpone issuing this Practice Statement until the completion of the Definition of
Material project. However, the Board concluded that providing guidance on making materiality
judgements as quickly as possible would be useful and responded to requests for guidance.
BC15 Moreover, the Board observed that, since the proposed amendments in the Definition of
Material ED do not constitute substantive changes to the existing requirements in IFRS
Standards, they are unlikely to result in a change in practice for most entities or to significantly
affect entities’ financial statements. Therefore, the guidance in this Practice Statement would
not be affected by the proposed amendments, other than by the possible need to update the
definition of material quoted in the document.

2
‘… the assessment needs to take into account how users […] could reasonably be expected to be influenced in making
economic decisions’ [emphasis added].

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Materiality judgements are pervasive

BC16 The Board discussed whether to focus the guidance in the Practice Statement on IFRS
presentation and disclosure requirements only, but concluded that the need for materiality
judgements is pervasive in the preparation of financial statements, also encompassing
recognition and measurement requirements. Consequently, the Board provided, throughout
the Practice Statement, guidance on how to make materiality judgements in the context of
recognition and measurement as well as of presentation and disclosure.

Primary users and their information needs

BC17 The Practice Statement explains that, when making its materiality assessments, an entity
should consider the primary users of its financial statements—its primary users—as defined
by the Conceptual Framework, that is, existing and potential investors, lenders and other
creditors. The Board discussed whether it would be appropriate to emphasise the existence,
among those primary users, of different subsets of users whose information needs might differ.
However, the Board concluded that requiring an entity to identify different subsets of primary
users, or focusing on any special information needs and expectations those users might have,
could create a tension with the definition of general purpose financial statements, which
focuses on the common information needs of a wide range of users. Consequently, the
Practice Statement refers to the three categories of primary users identified in the Conceptual
Framework—existing and potential investors, lenders and other creditors.
BC18 Furthermore, the Board decided to emphasise in the Practice Statement that the primary users
of an entity’s financial statements include potential investors, lenders and other creditors, as
well as existing ones. The Board concluded this would address concerns some stakeholders
expressed about an inappropriate focus on specific existing users; the Board decided to make
clear that an entity cannot narrow the information provided in its financial statements by
focusing only on its existing users’ information needs.
BC19 An entity considers decisions its primary users make on the basis of the financial statements
when deciding what information to include in those statements. Consequently, the Board
decided the Practice Statement should describe primary users’ decisions and related
information needs as set out in the Conceptual Framework. Primary users’ decisions depend
on the returns they expect from the resources they provide to an entity. Expectations about
returns, in turn, depend on primary users’ assessment of the amount, timing and uncertainty
of the future cash inflows to the entity, as well as on the assessment of management’s
stewardship of the entity’s resources.
BC20 The Board further considered the Conceptual Framework when developing its guidance on the
information needs of primary users an entity should consider when making materiality
judgements. Providing all the information existing and potential investors, lenders and other
creditors need is not the objective of general purpose financial statements. The Board clarified
that an entity is not required to address information needs that respond to unique or individual
information requests. An entity should aim to meet primary users’ common information needs.
In developing its guidance, the Board clarified that, to avoid losing information relevant to one
category of primary users (among the three identified in the Conceptual Framework), the
common information needs are not limited to the information needs simultaneously shared
across all categories of primary users. An entity separately identifies the common information
needs for each of the three categories, and meets the total of these needs.

Interaction with local laws and regulations

BC21 The Board discussed the interaction of materiality requirements in IFRS Standards with local
laws and regulations in the light of stakeholders’ comments relating to potential conflicts
between the guidance in the Practice Statement ED and local legal or regulatory requirements.
The Board noted that the Practice Statement provides guidance on making materiality
judgements when preparing financial statements in accordance with IFRS Standards; it does
not provide guidance on how to apply local legal or regulatory requirements.

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BC22 Nevertheless, the Board acknowledged that local requirements might affect information
provided in the financial statements. In these circumstances, an entity must comply with the
materiality requirements in IFRS Standards, but the Standards do not prohibit the disclosure
of additional information required by local laws or regulations, even if that information is not
material according to IFRS Standards. A conflict would only occur if local laws or regulations
prohibit the inclusion of information that is material for the purpose of IFRS Standards. No
respondents to the Practice Statement ED and no participants in the outreach organised by
the Board reported such a circumstance.
BC23 When information in addition to that required by IFRS Standards is provided in the financial
statements, paragraph 30A of IAS 1 requires an entity to ensure that material information
required by the Standards is not obscured. The Board observed that the appropriate
organisation of information in the financial statements would allow an entity to meet that
requirement.

Making materiality judgements

BC24 Respondents commenting on the Practice Statement ED welcomed the fact it gathered
guidance on materiality from multiple IFRS Standards. However, some respondents suggested
it would be useful to also describe the practical steps an entity follows when making materiality
judgements in the preparation of its financial statements. The Board developed a four‑step
process (materiality process) in consultation with the ASAF, the CMAC and the GPF. The
description of the materiality process illustrates the role materiality plays in the preparation of
financial statements and clarifies how a materiality judgement is made. The materiality process
also identifies the factors an entity should consider when making materiality judgements.
BC25 Consistent with the non‑mandatory status of the Practice Statement, the Board developed the
materiality process as an example of the approach an entity may follow in making materiality
judgements, but clarified that the materiality process includes the materiality requirements an
entity must apply to state compliance with IFRS Standards.
BC26 The Board considered whether to focus its guidance on the application of judgement or to
illustrate the overall process of which materiality judgements are a part. However, as some
respondents to the Practice Statement ED noted, describing the overall process helps an entity
understand how materiality judgements can influence the preparation of its financial
statements, as well as how the various materiality decisions are connected with each other.
BC27 The Board included Step 1 (identify) to provide an entity with a clear starting point for its
assessments. Stakeholders largely agreed that an entity should use the requirements in IFRS
Standards to identify information that primary users might need to make decisions about
providing resources to the entity. When using the requirements in IFRS Standards, an entity
benefits from the assessment the Board makes when developing IFRS Standards—when
developing a Standard the Board identifies information it expects will meet the needs of a broad
range of primary users. The Board also considered that some information not specified in IFRS
Standards might be necessary to enable primary users to understand the impact of an entity’s
transactions, other events and conditions on the entity’s financial position, financial
performance and cash flows. Therefore, the Board decided that the entity’s knowledge about
its primary users’ common information needs should be an additional input to Step 1. On the
basis of that knowledge, an entity should consider whether to include additional information
not specified by IFRS Standards in its financial statements.
BC28 Step 2 (assess) describes factors an entity should consider in identifying whether an item of
information is material. The Board concluded that the application of judgement in assessing
whether information is material involves both quantitative and qualitative considerations.
Respondents to the Practice Statement ED also agreed that, in making materiality judgements,
an entity should consider both quantitative and qualitative factors. The Practice Statement
includes some examples of materiality factors. However, the Board decided to describe a
limited number of factors rather than provide an exhaustive list of considerations to be taken
into account.

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BC29 The Board decided to include some guidance in the materiality process on the way an entity
should reflect its materiality judgements. Step 3 (organise) deals with the output of an entity’s
materiality judgements and provides guidance the entity might want to consider to make its
financial statements easier to understand. The Board recommends that an entity considers the
different roles of the primary financial statements and the notes in deciding whether to present
an item of information separately in the primary financial statements, to aggregate it with other
information and/or to disclose the information in the notes. However, the Board decided not to
provide further guidance on those topics in the Practice Statement. A discussion of the roles
of the different components of the financial statements, as well as of the implications of those
roles, has been included in the Principles of Disclosure Discussion Paper, which the Board
published in March 2017.
BC30 Step 4 (review) gives an entity the opportunity to ‘step back’, once it has prepared its draft
financial statements, and consider the information from an aggregated perspective. The Board
discussed whether this step duplicates the assessment performed in Step 2 and clarified that
an entity makes its materiality judgements in Step 2, but then reviews these judgements once
a draft of the financial statements is available. In Step 2, an entity based its assessment on
the expected financial statements as a whole, while it was still preparing its draft. In Step 4, an
entity checks its assessment against the actual draft financial statements—this review may
lead the entity to revisit the assessment performed in Step 2, provide additional information in
the financial statements, remove immaterial information or reorganise existing information.

Specific topics

Prior‑period information
BC31 When discussing materiality judgements about prior‑period information included in financial
statements, the Board acknowledged some legal or regulatory requirements might set out the
amount of prior‑period information to include in the financial statements. However, the Board
decided that providing guidance on making materiality judgements about prior‑period
information in the Practice Statement would be necessary to promote behavioural change
consistently across all parts of the financial statements and to encourage entities to exercise
greater judgement when determining what information to include or not to include in financial
statements.
BC32 The Board developed the guidance in the Practice Statement in the light of the minimum
comparative information required by IAS 1. However, the Board acknowledged that an entity
needs to consider any legal or regulatory requirements when making materiality judgements
about prior‑period information. Consequently, the Board decided to explain that, in its
current‑period financial statements, an entity may summarise prior‑period information,
compared to the way it was included in prior‑period financial statements, except when local
laws or regulations demand otherwise. The Board also clarified that an entity that wishes to
state compliance with IFRS Standards cannot provide less information than the information
required by the Standards, even if local laws and regulations permit otherwise.
BC33 The Board also emphasised that, when providing prior‑period information in addition to the
minimum comparative information required by IFRS Standards, information has to be provided
in accordance with those Standards and should not obscure material information. Some
stakeholders asked whether providing prior‑period information at the same level of detail as
current‑period information could be seen as obscuring material information in the
current‑period financial statements. The Board does not expect that such prior‑period
information would obscure current‑period material information.

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Errors
BC34 The Board discussed whether to include in the Practice Statement guidance to help entities
determine whether an error is material. The Board noted that the assessment of whether an
error could reasonably be expected to influence primary users’ decisions is an integral part of
the preparation of the financial statements, and therefore concluded that the Practice
Statement should address this topic. The Board noted that the materiality factors an entity
would apply to conclude whether an error is material are the same as those described in the
materiality process. Consequently, there is no need to provide any specific additional
guidance. In the ‘Errors’ section, the Practice Statement suggests that an entity refer to the
considerations described in the materiality process.
BC35 Respondents to the Practice Statement ED asked the Board to also address the situation in
which an entity faces errors generated by the accumulation over several periods of errors that
were immaterial both in individual prior periods and cumulatively over all prior periods
(sometimes called ‘cumulative errors’). The Board concluded it would be helpful to clarify that,
in such circumstances:
(a) materiality judgements about cumulative errors that an entity made at the time the
prior‑period financial statements were authorised for issue need not be revisited in
the current period, provided those judgements were reasonable at the time they were
made and the entity considered information that was available, or was reasonably
expected to be available, at that time; however
(b) an entity needs to assess whether cumulative errors have become material to the
current‑period financial statements.
BC36 The Board decided to include a statement in the Practice Statement to remind an entity that a
cumulative error must be corrected if it becomes material to the current‑period financial
statements. The Board discussed whether to provide further guidance on how to correct such
an error, but concluded that the Practice Statement should focus on how to make materiality
judgements, instead of dealing with the consequences of these judgements. IAS 8 contains
the requirements on the correction of errors.
BC37 The Practice Statement ED included some wording implying that if an entity intentionally
misstates or omits information to achieve a particular presentation or result, such an error is
always material. Respondents to the Practice Statement ED commented that the wording
appears inconsistent with paragraph 41 of IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors. Paragraph 41 of IAS 8 does not characterise such errors as material,
however, it requires the correction of all errors made intentionally to achieve a particular
presentation of an entity’s financial position, financial performance or cash flows. The Board
decided to align the wording in the Practice Statement with the wording of paragraph 41 of
IAS 8.

Information about covenants

BC38 When discussing whether the existence of a covenant, or similar contractual terms, could
influence materiality judgements, the Board identified two concerns:
(a) do any specific considerations apply in making materiality judgements on information
about the existence and terms of a covenant, or a covenant breach?
(b) does the existence of a covenant influence materiality judgements about information
other than about the existence of the covenant, or a covenant breach, included in the
financial statements?

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BC39 In respect of the first concern, the Board concluded that, in addition to the materiality factors
described in the materiality process, materiality judgements are specifically influenced by the
consequences of a breach occurring and the likelihood of that breach occurring. In particular,
the Board clarified that, regardless of the significance of the consequences of a breach
occurring, information about the covenant is not material if the likelihood of the breach
occurring is remote. In providing this clarification, the Board applied the disclosure threshold
set in paragraph 28 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets
regarding the disclosure of contingent liabilities.
BC40 In respect of the second concern, the Board discussed including in the Practice Statement
guidance stating that the existence of a covenant should not influence an entity’s assessment
of the materiality of other information in the financial statements. In other words, an entity is
not required to reperform its materiality assessments the closer it gets to breaching a covenant.
However, some stakeholders observed that such guidance would conflict with existing
guidance developed by other parties on the assessment of the materiality of errors. To avoid
creating any confusion among preparers and others involved in financial reporting, the Board
decided not to include in the Practice Statement guidance on the impact of covenants on
materiality assessments.

Materiality judgements for interim reporting

BC41 The Board discussed whether to provide guidance on how to make materiality judgements
when preparing an interim financial report. The Board concluded that, when preparing an
interim financial report, an entity should consider the same materiality factors it considers in
preparing its annual financial statements. However, the Board also noted that it would be
helpful to explain any additional considerations relevant to making a materiality judgement in
the preparation of an interim financial report. In particular, the Board noted that it would be
helpful to explain how the different time period and purposes of an interim financial report,
compared to the annual financial statements, affect materiality judgements, as well as to
address some practical concerns raised by respondents to the Practice Statement ED.

Materiality judgements for accounting policy information (see

paragraphs BC76H–BC76AB of IAS 1)
BC41A In February 2021 the Board amended IAS 1 to require an entity to disclose its material
accounting policy information rather than its significant accounting policies.
BC41B To help entities to apply the amendments to IAS 1, the Board also amended IFRS Practice
Statement 2 to illustrate how an entity can judge whether accounting policy information is
material to its financial statements.
BC41C The Board added guidance and examples to IFRS Practice Statement 2 to help an entity apply
the four-step materiality process to accounting policy information. The guidance and examples
help an entity apply the amendments to IAS 1 by:
(a) confirming that in assessing whether accounting policy information is material, an
entity considers both qualitative and quantitative factors (see paragraph 88C);
(b) linking materiality judgements to accounting policy disclosures using the four-step
materiality process described in paragraph 33 (see paragraph 88C).
(c) emphasising the need to focus on useful information for users of financial statements
(see paragraphs 88C–88E); and
(d) demonstrating how an entity can apply the four-step materiality process to address:
(i) standardised (boilerplate) information disclosed as part of material
accounting policy information (see Example S); and
(ii) accounting policy information that only duplicates or summarises the
requirements of IFRS Standards (see Example T).

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BC41D Examples S and T are intended only to illustrate the application of the amendments to IAS 1
and the four-step materiality process to accounting policy information. They do not illustrate
the application of the definition of material to all disclosure requirements of IFRS 15 Revenue
from Contracts with Customers and IAS 36 Impairment of Assets. An entity is also required to
comply with the other disclosure requirements of those IFRS Standards.
BC41E The Board concluded that accounting policy information that includes standardised
information, or that duplicates or summarises some of the requirements of IFRS Standards,
could sometimes be material. The Board added guidance about when such accounting policy
information might be material to an entity’s financial statements (see paragraph 88F).
BC41F The Board concluded that, as the amendments provide non-mandatory guidance on the
application of the definition of material to accounting policy information, transition requirements
and an effective date for these amendments are unnecessary.

Likely effects of this Practice Statement

BC42 The Board is committed to assessing and sharing knowledge about the likely costs of
implementing proposed new requirements and guidance—the costs and benefits are
collectively referred to as ‘effects’. The Practice Statement is designed to provide guidance on
how to make materiality judgements in the preparation of financial statements. The Practice
Statement does not change any requirements in IFRS Standards or introduce any new
requirements. With no changes in existing requirements and given that the application of the
Practice Statement is not required to state compliance with IFRS Standards, the Board
concluded that a separate effects analysis was not necessary.
BC43 The expected effects of the Practice Statement have been considered as part of the Board’s
discussions. The Board expects the Practice Statement will:
(a) enhance awareness of the role of materiality in helping to promote positive changes
in behaviour (such as to discourage rigid adherence to checklists by an entity
preparing financial statements);
(b) encourage an entity to exercise judgement to a greater extent when preparing
financial statements, which should lead to a reduction in boilerplate disclosures and
redundant information and provide a framework for assessing the need in the financial
statements for information that is additional to disclosure requirements specified by
IFRS Standards; and
(c) provide a useful reference point for discussions between an entity, its auditors and
regulators on the assessment of materiality, which could help facilitate agreement.
BC44 The Board does not expect any significant costs associated with the application of the Practice
Statement because it introduces no new requirements nor is the application of the Practice
Statement mandatory. However, some implementation costs might be faced by an entity that
has previously relied on a checklist approach when preparing its financial statements. The
Board expects such an entity would apply more judgement when deciding what information to
include in the financial statements, if it follows the guidance in the Practice Statement. The
Board concluded that the benefits of higher-quality disclosures and easier access to
information for primary users of financial statements exceed the implementation costs required
when entities apply judgement in preparing financial statements, rather than following a
checklist. Conversely, an entity already applying appropriate judgement in the preparation of
its financial statements would incur no additional implementation costs and could benefit from
the issue of the Practice Statement in its interaction with auditors and other stakeholders.
BC45 The effects the Board expects from the Practice Statement were assessed against the
comments received on the Practice Statement ED. Overall, respondents confirmed the Board’s
expectations and welcomed the proposal to issue the Practice Statement.

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Interaction with the Board’s other projects

BC46 The Board decided to issue this Practice Statement before the finalisation of the Principle of
Disclosures project, for which a Discussion Paper was published in March 2017; the Definition
of Material project, for which an Exposure Draft was published in September 2017; or the
Conceptual Framework project—the revised Conceptual Framework is expected to be issued
in 2018.3 The Board considered whether to postpone issuing this Practice Statement until the
completion of one or more of those projects; however, it concluded that it would be useful to
provide guidance on making materiality judgements as quickly as possible, to respond to
requests for guidance. Moreover, the Board concluded that the finalisation of these projects
would be unlikely to affect the guidance in the Practice Statement.

3
In 2018 the Board issued a revised Conceptual Framework. References to the Conceptual Framework in this Practice
Statement were updated to refer to the revised Conceptual Framework.

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Dissenting opinion
Dissent of Ms Françoise Flores from Disclosure of Accounting
Policies
DO1 Ms Flores voted against the publication of Disclosure of Accounting Policies, which amends
IAS 1 and IFRS Practice Statement 2. The reasons for her dissent are set out below.
DO2 Ms Flores agrees with those amendments to IAS 1 and IFRS Practice Statement 2 which aim
to provide primary users of financial statements with all and only relevant accounting policy
information. She also supports the Board’s past and current efforts to clarify how the concept
of materiality should be applied more generally. She agrees with all the amendments except
paragraph 117B(e) of IAS 1 and paragraph 88F of IFRS Practice Statement 2.
DO3 In particular, Ms Flores disagrees with paragraph 117B(e) of IAS 1, which implies that
accounting policy information that includes information that is standardised or duplicates the
requirements of IFRS Standards could be material when the underlying accounting is complex;
and that, therefore, such information is required to be included in the financial statements.
Ms Flores believes that the notion of complexity is highly subjective and, therefore, does not
constitute a robust basis for a requirement. Introducing such a subjective assessment could,
in her view, undermine the overall aim of the amendments, which is to contribute to a better
application of the concept of materiality to accounting policy disclosures and thereby help an
entity reduce the disclosure of immaterial accounting policy information. Facing such
subjective judgements, an entity may opt for ‘being on the safe side’, providing more
information than is required. In her view, paragraph 117B(e) of IAS 1 is an unsatisfactory
response to feedback from users of financial statements who said they find entity-specific
accounting policy information to be more useful than information that is standardised or that
duplicates or summarises the requirements of IFRS Standards.
DO4 A minority of respondents were concerned that the Board’s proposals could be read as
prohibiting the publication of any accounting policy information that is standardised, or that
duplicates or summarises the requirements of IFRS Standards. Ms Flores believes that the
appropriate response would have been to explain that such accounting policy information may,
in some circumstances, be useful in providing context for entity-specific information. Such an
approach would enhance the readability of entity-specific accounting policy information.
DO5 Furthermore, Ms Flores notes that paragraph 2.36 of the Conceptual Framework of Financial
Reporting, paragraph 7 of IAS 1 and the guidance included in paragraphs 13–23 of IFRS
Practice Statement 2 state that users of financial statements are expected to have a
reasonable knowledge of business and economic activities, but may need to seek the aid of
an adviser to cope with perceived complexity. In her view, investors are responsible for
ensuring that their economic decisions are derived from a proper and knowledgeable
understanding of an entity’s financial statements, which includes understanding the
requirements of IFRS Standards. IFRS Standards should be regarded as public knowledge in
a financial reporting environment. No mere recitation of the words from the IFRS Standards
can meet the definition of material without stretching that definition endlessly. In Ms Flores’
view, improving users’ understanding of the requirements in IFRS Standards should be
achieved through education by the IFRS Foundation. Such an objective should not be
achieved by amending the requirements of IFRS Standards.

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