| Can past decisions about materiality affect future accounting? |
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The principles in the Standards of GRAP need not be applied to immaterial transactions. Entities can develop their own accounting treatment for immaterial transactions.
Historically, preparers and auditors have often incorrectly held the view that entities should keep record of previous decisions about the accounting treatment applied to immaterial transactions so that they could assess in future reporting periods, if the cumulative effect is material.
Decisions about materiality are period specific. They are similar to the development of estimates and other judgements applied by management in a particular reporting period. Materiality should be assessed based on facts and circumstances that are known to management at the time when decisions are taken. To ensure that today’s decisions about materiality are appropriate for the future, management should consider information at its disposal about future operations, projects, or impending changes to the environment.
If management develops appropriate materiality thresholds (quantitative) and criteria (qualitative) based on relevant information available at the time, then decisions about materiality should not affect future periods. If inappropriate materiality thresholds and criteria are developed, decisions about the accounting for transactions based on materiality would be made in error. When errors are discovered, they have an effect on current or past accounting (or both). Whether, and how these errors are corrected, will need to be decided using the principles in GRAP 3 on Accounting Policies, Changes in Accounting Estimates and Errors. To illustrate using a common example: An entity is deciding whether some of the assets it has purchased need to be accounted for using GRAP 17 on Property, Plant and Equipment or if an alternative accounting treatment could be applied, e.g., expensing in the year of purchase.
Scenario A: Based on the information available about the nature and value of the entity’s assets, management decides that assets that meet certain qualitative criteria with a value of less than R5 000 should be expensed. GRAP 17 should be applied to all other assets.
Scenario B: Using the same information as in scenario A, the entity comes to the same conclusions about materiality, except that it has not considered that the entity’s strategic plan indicates that it will be expanding its operations which will require a significant purchase of the assets in question over the next three years. The change in the volume and significance of the asset means that a lower threshold should have been developed.
In scenario B, management has incorrectly assessed materiality as it did not consider information it had at its disposal about the future. Any decisions taken as a result, would be in error. The treatment of these errors and their corrections will require in a separate assessment by management.
IGRAP 21 on The Effect of Past Decisions on Materiality outlines a detailed discussion on how, and when management should assess materiality, and when circumstances may indicate that an error(s) has been made. IGRAP 21 is effective for financial periods commencing on or after 1 April 2023, and earlier application is encouraged. The Guideline on The Application of Materiality to Financial Statements, although not mandatory, should be applied by entities when considering materiality.
Access IGRAP 21 and the Guideline. |
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