Corporate reporting – FRC guidance on applying materiality in UK corporate reporting

The FRC discusses the importance of materiality when preparing an annual report and outlines a six-step process to help issuers decide what meets the test

The Financial Reporting Council (FRC) has published guidance on Applying materiality in corporate reporting, which is intended to help preparers, investors and others understand how materiality applies to corporate reporting.

The FRC acknowledges that annual reports have become longer and more complex and says that it is therefore important that issuers make good materiality judgements in deciding what information to include in the annual report.

Key points the FRC makes include:

• materiality is ultimately a matter of board judgement and depends on both quantitative and qualitative factors – information can be material, even when quantitatively small, if its nature or context is important;
• information can be material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that shareholders and others take on the basis of the annual report; and
• directors should consider the applicable reporting requirements, the particular circumstances of the issuer and what information users of the annual report need in deciding what to disclose.

The FRC sets out suggestions for a process that could be used when preparing annual reports, including some tips such as refreshing materiality assessments annually (and removing content accordingly) and reducing duplication through cross-referencing.