Speech From the Office of the Investor Advocate Addresses FASB’s Proposals Regarding the Definition of Materiality
On August 22, the Investor Engagement Advisor in the Office of the Investor Advocate, Stephen Deane, gave a speech to the Tulsa chapter of the Institute of Management Accountants in which, among other things, he addressed two proposals by the Financial Accounting Standards Board (FASB) to revise the definition of materiality under generally accepted accounting standards.
In 2015, FASB proposed two updates that would remove its definition of materiality established in Concepts Statement No. 8 in favor of relying on the US federal courts’ definition of materiality, under which “information is material if there is a substantial likelihood that the omitted or misstated item would have been viewed by a reasonable resource provider as having significantly altered the total mix of information.” In doing so, FASB emphasized that materiality is a “legal concept” and that removal of its definition would align FASB’s understanding of materiality with the legal concept of materiality.
Mr. Deane noted, however, that investors and investor groups raised several concerns with regards to the FASB’s proposals, including that the proposals would reduce the flow of information to investors and shift decision-making on materiality from accountants to lawyers. He further acknowledged the lack of an existing framework for the evaluation of whether a disclosure is “material,” including who should make that determination for the purposes of the accounting standards, and as a result, the “inconsistent application of the materiality standard.”
In response to the FASB proposals, Mr. Deane noted the Office of the Investor Advocate’s proposal to adopt a hybrid approach rooted in both a prior FASB definition of materiality that more closely aligns with the definition adopted by the US Supreme Court (in Concepts Statement No. 2), as well as the Securities and Exchange Commission Staff Accounting Bulletin 99, which provides a “helpful framework for evaluating materiality decisions” and takes into account “quantitative factors and qualitative factors”
The full text of Mr. Deane’s speech is available here.