Materiality

• DOI: http://doi.org/10.1002/jcaf.22151
• Author: Donald A. Walker
• Published date: 01 March 2016
• Date: 01 March 2016

105

© 2016 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22151

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SEC

Materiality

Donald A. Walker Jr.

When describing the SEC’s

mission, or actions, or views,

“materiality” is a topic reserved

for consideration of the legal

process in addressing a poten-

tial fraud perpetrated on

investors as defined in Rule

10b-5 or for description of the

interactions of staff reviewers

in the Division of Corpora-

tion Finance and Office of the

Chief Accountant with a regis-

trant company and its auditors

and counsel regarding the pos-

sible restatement of financial

statements due to a potential

accounting/reporting error. The

interactions with staff review-

ers are more familiar to corpo-

rate management and directors

because the review process is a

periodic process affecting each

company at least once every 3

years under the mandate of the

Sarbanes-Oxley Act. Accord-

ingly, changes in the account-

ing authoritative literature that

address materiality are impor-

tant to corporate manage-

ment and directors who have

responsibility for Securities Act

and Exchange Act compliance

reporting.

On September 24, 2015,

the Financial Accounting

Standards Board (FASB)

issued two Exposure Drafts for

comment. The first contained

amendments to FASB

Concepts Statement No.8,

Conceptual Framework for

Financial Reporting, to clarify

the concept of “materiality.”

It clarified that the FASB does

not define materiality and

that materiality is a legal con-

cept, and replaced the existing

discussion with a discussion of

the U.S. Supreme Court’s defi-

nition of materiality:

Currently, the Board

observes that the U.S.

Supreme Court’s defini-

tion of materiality, in the

context of the antifraud

provision of the U.S.

securities laws, generally

states that information

is material if there is a

substantial likelihood

that the omitted or mis-

stated item would have

been viewed by a reason-

able resource provider

as having significantly

altered the total mix of

information.

It states that the above

statement is a summary of

observations of two cases;

TSCIndustries, Inc. v. North-

wa y, 426 U.S. 438 (1976) and

Basic Inc. v. Levinson, 485

U.S.224 (1988).

The second was a proposed

Accounting Standards Update,

Notes to Financial Statements

(Topic 235): Assessing Whether

Disclosures Are Material.

Theamendments to Topic 235

would state that materiality

is applied to quantitative and

qualitative disclosures individu-

ally and in the aggregate in the

context of financial statements

taken as a whole, that mate-

riality is a legal concept, and

that omission of immaterial

information is not an account-

ing error. This could reduce the

number of what currently are

categorized as accounting errors

and required to be reported to

the corporate audit committee.

One way to look at these

Exposure Drafts views the first

as a truing up of the FASB

Conceptual Framework with

the legal context of financial

statements and disclosures and

the second as a guide to the

content of financial statement

footnotes. Another view, how-

ever, finds these drafts want-

ing in that they carve out and

address the Notes to Financial

Statements but fail toaddress

materiality judgments affecting

the primary financial state-

ments to which the Notesto

Financial Statements are

attached.