The Issue of Materiality

The term “materiality” has been used in accounting for over a hundred years and through a variety of definitions is focused primarily on determining the importance of a matter for financial reporting purposes (Edgley 2014, 255-256). With the growth of sustainable reporting and the subsequent integrated reporting, the term materiality is now applied to non-financial reporting elements as well. The Supreme Court ruled that determination of materiality must be both qualitative and quantitative based on all information available and that the determination of a matter is either material or not material (Eccles and Krzus 2015, 119). When reviewing non-financial matters like environmental or social aspects, a materiality determination can be useful in ensuring that the elements being reported are useful and impact a corporation’s ability to generate value.

There is a variety of reporting frameworks and they each handle materiality in different ways regarding scope, definition, and intention. For example, the International Integrated Reporting Council (IIRC) specifies the definition of materiality time frame as short, medium, and long terms, while regulatory bodies like the Securities and Exchange Commission (SEC) does not specify a time frame at all. The SEC also defines the reporting boundary as things that impact the company only, whereas the IIRC states that materiality can apply to things broader than just the company (Eccles and Krzus 2015, 125). Not only do the definitions vary between frameworks, but this determination is left up to corporations to make themselves, and in regulated reporting, anything that is considered to be not material does not need to be reported. This leaves a lot of gray area for corporations to comply with requirements while also omitting potentially negative elements in their reporting.

For environmental reporting to be effective and useful, the items that are being reported need to be material. With a variety of frameworks and definitions to navigate, this can help companies be able to customize the reporting to their specific business activities, but it can also make things more difficult for corporations to implement. Materiality is a core concept in ensuring that effort and focus is not wasted on aspects that do not impact a business, however, more work needs to be done to establish firmer definitions and determination processes to ensure consistent application of frameworks for maximum effectiveness.

Author: Logan Callen

References

Edgley, Carla. 2014. “A Genealogy of Accounting Materiality.” Critical Perspectives on Accounting 25: 255-271. http://dx.doi.org/10.1016/j.cpa.2013.06.001

Eccles, Robert G., and Michael P. Krzus. 2015. The Integrated Reporting Movement: Meaning Momentum, Motives, and Materiality. New York: Wiley.