FASB's James Kroeker: Board Will Account for Unexpected Pushback on Materiality Definition

Chris Gaetano
Published Date:
Sep 28, 2016
Obnoxious Bullhorn

Vice-chair of the Financial Accounting Standards Board James Kroeker said that the board did not expect the level of pushback it received from its proposed definition of "materiality" and said it would take a step back and ponder the feedback it has received so far, according to Accounting Today. The definition, outlined in a proposal that came out last September, said that "materiality would be identified as a legal concept," as opposed to an accounting concept. 

“Stakeholders indicated that the current discussion of materiality in our Conceptual Framework is inconsistent with the legal concept of materiality as established by the U.S. Supreme Court,” said FASB Chairman Russell G. Golden in a statement when the proposal came out. “This led to uncertainty about organizations’ abilities to interpret what disclosures are material; and the Board’s ability to identify and evaluate disclosure requirements in accounting standards. 

The Supreme Court's definition, according to the FASB proposal, "can be summarized by stating that disclosures generally should be evaluated as material based on whether there is a substantial likelihood that the omitted or misstated disclosure would have been viewed by a reasonable resource provider as having significantly altered the total mix of information available in making a decision." In this respect, the board "observes a portion of the legal definition in one context" but "it does not promulgate a definition of materiality." 

This, Kroeker said, was a surprisingly contentious issue. The NYSSCPA was one of many who expressed concern about the proposal. Issuing a comment letter in response to the exposure draft, the Society said that saying materiality is a legal concept would "create a certain amount of uncertainty along with additional interpretations of existing legal definition due to court cases. Any amendments to the existing definitions through new legal doctrines will also have regulatory, legal and audit consequences. We can foresee the use of legal counsel increasing on all fronts." 

Kroeker, speaking as part of a panel at a Pace University conference, said that the FASB plans to "take a step back" and think about how the proposal can incorporate critiques. He added that the board will host a roundtable later this year to bring stakeholders together to discuss the proposal "and make sure the system works." 

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