[Opinion] Demystifying Materiality of “Material Accounting Policy

Dr. Alok Kumar Garg – [2024] 163 taxmann.com 287 (Article)

Background

The Ministry of Corporate Affairs (MCA) has notified Companies (Ind AS) Amendment Rules, 2023 on 31 March 2023 and amended Ind AS 1, 8 and Ind AS 12 with the consequential changes in other standards. The amendments come into force with effect from 1 April 2023, i.e., Financial Year 2023-24. Among other changes, one of the major changes was in Ind AS 1 ‘Preparation of Financial Statements’, which requires companies to disclose in their financial statements ‘material accounting policies’ as against the erstwhile requirement to disclose ‘significant accounting policies’. The word ‘significant’ is substituted by ‘material’.

The above change is in line with amendments made to IAS 1 ‘Preparation of Financial Statements’, which is applicable for accounting periods commencing from 1 January 2023.

Disclosure of Material accounting policy Information

The amendment in Ind AS 1 specifies that “significant accounting policies” as a component of financial statement will now be disclosed as “material accounting policy information”. For the purpose, “Accounting policy information is material if, when considered together with other information included in an entity’s financial statements, it can reasonably be expected to influence decisions that the primary users of general-purpose financial statements make on the basis of those financial statements.”

The amendment clarifies that accounting policy information that relates to immaterial transactions, other events or conditions is immaterial and need not be disclosed. Accounting policy information may nevertheless be material considering the nature of the related transactions, other events, or conditions, even if the amounts are immaterial. However, it is not necessary that policies pertaining to material transactions, other events or conditions are itself material.

Determining whether accounting policies are material or not requires greater use of judgement. The amendment by way of example explains that an entity is likely to consider accounting policy information material to its financial statements if that information relates to material transactions, other events or conditions and:

• the entity changed its accounting policy during the reporting period and this change resulted in a material change to the information in the financial statements;
• the entity chose the accounting policy from one or more options allowed by Ind AS;
• the accounting policy was developed in accordance with Ind AS 8 in the absence of an Ind AS that specifically applies;
• the accounting required for them is complex and users of the entity’s financial statements would otherwise not understand those material transactions, other events, or conditions – such a situation could arise if an entity applies more than one Ind AS to a class of material transactions
• the accounting policy relates to an area for which an entity is required to make significant judgements or assumptions in applying an accounting policy, and the entity discloses those judgements or assumptions in accordance with para 122 and 125 of Ind AS 1.

Decision Tree for Evaluation of Material Accounting Policy Information

Click Here To Read The Full Article