Making materiality judgements as a preparer
How a preparer can use the four-step process in IFRS Practice Statement 2 to decide what belongs in a client's statements, applied to a real draft.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Most accountants learn materiality as an audit concept: a number the engagement partner sets at planning, below which misstatements are not worth chasing. Preparers use the word too, but often without a method. A note goes in because it was in last year's set; a line stays because the template had it; a disclosure is dropped because "it's not material", with nobody able to say why.
The IASB has published a method for exactly this. It is not mandatory, but it gives a preparer a way to reach and record materiality judgements that will stand up to a reviewer's questions. This article sets it out and applies it to a draft built in Achekam's Studio.
Preparer materiality is not audit materiality
An auditor uses materiality to plan the audit and evaluate what it finds. A preparer uses it to decide what goes into the statements and how it is shown. The IFRS Foundation states that IFRS Standards require companies to make materiality judgements in decisions about recognition, measurement, presentation and disclosure. That is a wider field than any single threshold.
The two can sit side by side on the same engagement. In a compilation or review, the firm is often both. Keep them apart in the file: the preparer's judgements about content belong with the statements, the assurance materiality with the engagement planning. For how the audit-side figure is chosen, see choosing a materiality benchmark.
Practice Statement 2's status: non-mandatory guidance
IFRS Practice Statement 2, Making Materiality Judgements, gives companies guidance on how to make materiality judgements when preparing general purpose financial statements under IFRS Standards. The IFRS Foundation is explicit about its status: it is a non-mandatory document that does not change or introduce any requirements, and companies are not required to comply with it to state compliance with IFRS Standards.
It was issued in September 2017, and companies are permitted to apply its guidance to financial statements prepared any time after 14 September 2017. In other words, it is available for every set a firm prepares today. Its value is practical: it turns an instinct into a sequence of decisions that can be written down.
The four steps: identify, assess, organise, review
The Practice Statement presents a four-step process companies may follow. IFAC's article "Making Sense of Materiality" summarises it:
- Identify information that has the potential to be material.
- Assess whether that information is in fact material.
- Organise the information so that it is communicated in a clear and concise manner.
- Review the draft financial statements, considering materiality from a wider perspective and as a whole.
In the assessment step, the IFAC article explains, information is material if an investor could reasonably be expected to be influenced by it when making investment decisions. For a small private company, the "investor" in practice is usually a lender, a shareholder who is not in management, or a prospective buyer. Ask what each would need.
Applying the steps to a draft built in the Studio
Achekam's Studio produces a full draft from the mapped trial balance: standard accounting policy wording based on IFRS for SMEs, labelled for review before issue, and notes that take their figures from the trial balance. Facts the trial balance does not hold are left as "[to be completed]". A full draft is a useful starting point for the four steps, because step one is partly done for you and partly not.
Identify. The draft shows what the trial balance holds. It cannot show what the ledger does not: security given for a director's personal loan, a court case, a covenant, a post-year-end event. Run the client's year-end questionnaire alongside the draft to surface those; see the year-end disclosure questionnaire. Each "[to be completed]" marker is also a prompt to identify.
Assess. For each item identified, decide whether it is material, considering size and nature. A small amount can be material for reasons other than its size, such as a dealing with a director, which when a small amount is still material explores.
Organise. Decide how material items are shown: their own line, a note, a sentence in an existing note. Remove or combine what is not material. Staff can write their own policies in place of the standard wording, which is often where organising produces the most improvement.
Review. Read the whole draft as the reader would. Does it tell the client's story? Is anything important hard to find? Is anything trivial given prominence?
Record the outcome of each step briefly in the working papers. One page for a small company is usually enough.
Using the automated review findings as one input, not the decision
Staff can run an automated review of a draft in Achekam. It lists findings for a person to accept, resolve or dismiss. It is advice only and does not block signing. Separately, the Validation & Math Engine runs fixed, non-AI checks such as double entry and note ties.
Both are useful during the review step, and neither is the materiality judgement. A finding that a note looks incomplete is a prompt to apply the assessment step, not an instruction to add text. A finding dismissed should be dismissed for a reason the preparer can state. Equally, a clean run of the automated review does not mean the draft passes step four, because the review cannot know what the client did not tell anyone.
The IFRS Foundation's Practice Statement 2 page describes the non-mandatory guidance and its four-step process. Try the steps on one client this season, record them on a single page, and use that page as the template for the rest of the portfolio.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
