Definitions
A social construct, the use of which involves judgement, exercised ultimately by board level executives, and inevitably involving subjectivity…
This page presents a listing of the most internationally recognised definitions of “materiality”, including a broad consensus definition produced by the Corporate Reporting Dialogue in 2016. The definitions reflect the views of different professions and institutions on its meaning. Despite obvious differences, they show important commonalities. Evident is an evolution from past accounting approaches focussed on the correctness and accuracy of information disclosed by a specific entity, to a focus that is also more forward-looking and strategic in assessing the performance of that entity in financial and broader terms. Consider who is the decision-maker implied, the time frame with which a decision is to be made, the size and nature of the subject matter assessed, and the degree to which the decision-maker is open to scrutinizing the related context (for example the value chain of the entity).
US Supreme Court (1976): A fact is material if there is “a substantial likelihood that the…fact would have been viewed by a reasonable investor as having significantly altered the total mix of information made available.” (TSC Industries, Inc. v. Northway, Inc, 426 US 438, 449 1976 – core definition used by SEC)
FASB (1980): “The omission or misstatement of an item is material in a financial report, if, in light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of an item.” (FASB Statement of Financial Accounting Concepts No. 2, FASB 1980, 132 and included in SAS No. 47, AU 312.10)
IFAC (2004), IASB (2007): “Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor.” (Para 6, ED ISA 320, IFAC 2004; Para 7, IAS 1, IASB 2007)
SEC (2005): “The term ‘material’, when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters about which an average prudent investor ought reasonably to be informed.” (Regulation S-X, Rule 1-02, SEC 2005; Regulation S-K requires public companies to describe known trends, demands and uncertainties that have a material impact on financial results in their Management’s Discussion and Analysis).
IASB (2010): “Information is material if omitting it or misstating it could influence decisions that users make on the basis of 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 Board cannot specify a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation.” (Conceptual Framework for Financial Reporting, IASB 2010)
IFAC/IAASB (2011): “Misstatements, including omissions, are considered material if they, individually or in the aggregate, could reasonably be expected to influence relevant decisions of intended users taken on the basis of the subject matter information. The practitioner’s consideration of materiality is a matter of professional judgement, and is affected by the practitioner’s perception of the common information needs of intended users as a group.” (ISAE 3000 International Standard on Assurance Engagements Exposure Draft 2011)
US Auditing Standards Board (ASB 2012): “misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users made on the basis of the financial statements” (AU-C 320.02).
European Commission (2019): “double materiality” – “the Non-Financial Reporting Directive has a double materiality perspective: (i) The reference to the company’s ‘development, performance [and] position’ indicates financial materiality, in the broad sense of affecting the value of the company… (ii) The reference to ‘impact of [the company”s] activities’ indicates environmental and social materiality.” (Guidelines on Non-Financial Reporting 2017 and Guidelines on Reporting Climate-related Information 2019)
Human Rights Reporting and Assurance Frameworks Initiative (2017): “salient issues” vs “business materiality” – “Companies should focus their human rights disclosure on the most severe actual and potential impacts on human rights associated with their activities and business relationships. The starting point for disclosure is, therefore, risk to human rights rather than risk to business, while recognizing that where impacts on human rights are most severe, they converge strongly with risk to the business as well.” (UN Guiding Principles for Business and Human Rights, Human Rights Reporting and Assurance Framework, RAFI)
Corporate Reporting Dialogue (2016): “Material information is any information which is reasonably capable of making a difference to the conclusions reasonable stakeholders may draw when reviewing the related information.” (Corporate Reporting Dialogue – IIRC, GRI, SASB, CDP, CDSB, FASB, IASB/IFRS, ISO)
Natural Capital Coalition (2016): “An impact or dependency on natural capital is material if consideration of its value, as part of the set of information used for decision making, has the potential to alter that decision.” (Natural Capital Protocol)
Investor’s definition (2015): “Financially material is any factor which might have a present or future impact on companies’ value drivers, competitive position, and thus on long-term shareholder value creation.” (RobecoSAM)
IIRC (2013): The report “should disclose information about matters that substantively affect the organization’s ability to create value over the short, medium and long term.” (IIRC International IR Framework)
GRI (2013): The report “should cover Aspects that: reflect the organization’s significant economic, environmental and social impacts; or substantively influence the assessments and decisions of stakeholders.” (GRI G4 Sustainability Reporting Guidelines)
WRI/WBCSD (2013): “Information is considered to be material if, by its inclusion or exclusion, it can be seen to influence any decisions or actions taken by users of it. A material discrepancy is an error (for example, from an oversight, omission or miscalculation) that results in a reported quantity or statement being significantly different to the true value or meaning.” (GHG Protocol 2004, Revised 2013)
AccountAbility (2008): “Materiality is determining the relevance and significance of an issue to an organisation and its stakeholders. A material issue is an issue that will influence the decisions, actions and performance of an organisation or its stakeholders.“
AccountAbility (2006): “materiality requires that the Assurance Provider states whether the Reporting Organization has included in the report the information about its sustainability performance required by its stakeholders for them to be able to make informed judgments, decisions and actions”.
Anthropological definition: “The state or quality of being material, embedded within and taking meaning and value from sociocultural and political economic structures and processes.” (Shankar and Cavanaugh, Annual Review of Anthropology 2012)
