What constitutes materiality?

One of the problems faced by any public company is knowing when it has to make public significant news. In the US, the law gives management a fair amount of latitude, in large part because quarterly reporting means it's never too long before companies are obliged to tell the world what has happened in the last three months. In most of the rest of the world, however, a different standard apply. In the European Union it's knows as ad hoc disclosure, and it kicks in as soon as practical after a "material" development. The difficulty comes in recognising when a development is indeed material. Last year, the European Securities and Markets Authority set a consultation about it, and then extended its duration to gather as many views as possible. The views are now in and published for all to see. Among them:

• Mazars: The Paris-based international accountancy firm argues that a principles- rather than rules-based approach is appropriate because the circumstances of each company are different. An example arises in its response to question 10, concerning whether failing to include a note to the accounts constitutes a misstatement. Mazars argues no, because materiality is a matter of judgement. Automatic qualification of results by the auditors would lead to a checklist mentality among issuers.
• SIX Regulation: Concerning the view of materiality in interim reports, the regulatory arm of the Swiss stock exchange argues that half-yearly reports are more often based on estimates than are the final set of accounts. Nonetheless, the principles of materiality are the same.
• SAP: The German listed company, whose software envelopes the accounting systems of many large corporations, said that practice suggests that companies apply rather different standards of materiality in reporting their affairs. "While one might argue that this diversity in practice indicates that the concept of materiality is not clearly and consistently understood," it wrote, "we believe that the different application of the concepts is due to the management judgment necessarily involved in the evaluation of the question when a misstatement or omission could be material enough to influence the economic decisions of users of financial statements."
• CRUF: The Corporate Reporting Users' Forum, an umbrella body of analysts in fund management, didn't think ESMA needed to get involved. It welcomed the opportunity to debate, of course, but it felt the accountancy boards, like the International Accounting Standards Board and the auditors' equivalent were a better venue for conducting it.

What happens next will be a considered response from ESMA, which could mean no action, some, or much.

Source document: The list of responses has links to the individual documents submitted.