Domenic N. Savini, CPA, CMA. MSA EthicQuest, Llc

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1 Page 1 IFRS Foundation 30 Cannon Street London EC4M 6H United Kingdom December 22, 2015 To whom it may concern: I wish to thank the IFRS Foundation and IASB for this opportunity to comment on the Exposure Draft entitled, Application of Materiality to Financial Statements. The views contained in this paper are strictly my own and do not represent any views or opinions held by any employer or organization that I might be affiliated with and/or fellow colleagues or associates. Because there is most certainly a need for a better understanding and application of materiality considerations in the field, the Board should be commended for taking on this project and proposing that any forthcoming guidance be deemed non-authoritative. However, the practice document as currently structured and written will be only marginally helpful at best. Please note the following concerns and suggestions: 1. Consider aligning to risk management practices - The concept of what is material has not only evolved in the courts but also in risk management practices that require finer gradations of risk and assessments of factors such as frequency, consequence, impact, and severity. These are all important in understanding what is material and are not embodied in accounting literature. The Board may wish to consider how risk management practices can help improve financial reporting. 2. Clarify the term Users - The practice document seems unclear and unfocused when discussing users citing users, primary users, external users, and typical and rational users. The Board may wish to re-visit who we intend to serve and whether there are different materiality thresholds for different user groups. 3. Eliminate Bias towards Quantitative - The document appears to have a bias towards quantitative assessments while ignoring the importance of qualitative considerations. The Board may wish to re-consider postpone issuance of this document and draw upon its Disclosures project that will undoubtedly provide valuable insight by identifying matters that should have been qualitatively reported. I have attached detailed comments for your consideration. Sincerely, Domenic N. Savini , FA , dsavini@ethicquest.com

2 Page 2 QUESTION 1 - FORM OF THE GUIDANCE DIS Question 1 Form of the guidance (a) Do you think that the guidance should be issued as nonmandatory guidance? Why or why not? (a) Assessing materiality is a matter of professional judgment, best left to the auditor and preparer/management to consider. Including this guidance as a Standard would be ill-advised as it would seriously impede necessary discussions. Furthermore, issuing this guidance as a Standard would result in numerous materiality interpretations throughout IFRS GAAP as the Board would undoubtedly grapple with materiality both quantitatively and qualitatively - in connection to (1) the reporting objectives, (2) each element of the financial statements, and (3) the different and numerous measurement attributes which are available. (b) Do you think that a Practice Statement is the appropriate form for non-mandatory guidance on applying the concept of materiality? Why or why not? If not, what alternative(s) do you propose and why? (b) The Practice Statement lacks specifics even in light of the given examples and seems to basically document to a large extent what is already conceptually known about materiality. What is lacking in practice is Educational guidance that can be used by both the auditor and preparer. For example, a materiality framework should be provided followed by case studies that illustrate both the quantitative and qualitative aspects of materiality. Materiality guidance should not only be non-mandatory, it should be informative and illustrative to best aid practitioners , FA , dsavini@ethicquest.com

3 Page 3 QUESTION - ILLUSTRATIVE EAMPLES DIS Question 2 Illustrative examples Do you find the examples helpful in the [draft] Practice Statement? I do not find the current examples particularly helpful. They are overly broad and too conceptually oriented making it difficult to really apply in practice. Do you think any additional practical examples should be included? Following the current format, additional examples would be of limited value. The Board should consider greater emphasis on specific cases that illustrate major concepts. If so, what scenarios should the examples address? Please be as specific as possible and explain why those example(s) would be helpful to entities. As mentioned above, a materiality framework should be provided followed by case studies that illustrate both the quantitative and qualitative aspects of materiality. The Board may wish to address materiality from different perspectives or approaches. That is, materiality from: (1) an industry/regulatory point of view, (2) entity-specific application, (3) user perspective and (4) internal control perspective. Furthermore, the Board should consider aligning its efforts with Enterprise Risk Management practices and ISO standards which address such factors as severity, frequency, impact, and consequence when assessing risk / materiality. Like a sensitivity analysis, identical case studies can be depicted showing different materiality outcomes based on (1) how one weights or considers qualitative information compared to quantitative assessments and (2) the different perspectives discussed above , FA , dsavini@ethicquest.com

4 Page 4 DIS Question 3 Content of the [draft] Practice Statement (a) Do you think that any additional content should be included in the Practice Statement? If so, what additional content should be included and why? (b) Do you think the guidance will be understandable by, and helpful to, preparers of financial statements who have a reasonable level of business/accounting knowledge and IFRS? (a) The Board may wish to address materiality from different approaches. The Board may wish to address materiality from different perspectives or approaches. That is, materiality from: (1) an industry point of view, (2) entityspecific application, (3) user perspective and (4) internal control perspective. Furthermore, the Board should consider aligning its efforts with Enterprise Risk Management practices and ISO standards which address such factors as severity, frequency, impact, and consequence when assessing risk/ materiality. Like a sensitivity analysis, identical case studies can be depicted showing different materiality outcomes based on (1) how one weights or considers qualitative information compared to quantitative assessments and (2) the different perspectives discussed above. Furthermore, the Board should consider aligning its efforts with Enterprise Risk Management practices and ISO standards which address such factors as severity, frequency, impact, and consequence when assessing risk / materiality. (b) Understandable yes but only marginally helpful at best , FA , dsavini@ethicquest.com

5 Page 5 DIS If not, which paragraphs/sections are unclear or unhelpful and why? Unclear paragraphs: 4 6. These paragraphs make up the general characteristics of materiality and there is no discussion or mention made of qualitative and quantitative materiality assessments. 3 & 6. Because Enterprise Risk Management (ERM) and ISO risk-reporting frameworks are so different from GAAP Contingency/Liability frameworks, they are rarely, if ever, available to users on the same terms. 5 & 6. Because some primary users of F/S may have different or lower materiality thresholds or may rely more on qualitative materiality assessments, the Board should consider discussing how materiality thresholds may differ in these paragraphs. 7, 9 & 16. I have trouble reconciling the definition that refers to users and then at par. 9 we discuss external parties. Later, at par. 16 we then say that management should focus on typical and rational users. This lack of clarity in the document seems to establish a filter that says if a user is not a primary user who is also typical and rational their materiality considerations are not important. Apart from how management would ever assess a reader to be typical and rational, how can these F/S be called general purpose when we seem to be targeting a subset group of users to the exclusion of others? 27. Last sentence. Why not be clear and state that qualitative , FA , dsavini@ethicquest.com

6 Page 6 DIS assessments may be more appropriate than quantitative assessments of materiality. 28. Does sensitivity imply different materiality thresholds? The examples seem to suggest so. As such, the Board should consider discussing materiality thresholds and how they can differ not only among financial statement items but also in regards to items depending upon whether they are displayed or disclosed. 29. When taking immaterial items collectively and considering them with other information, does that information have to be within the same family of items or activities? Par. 39 (c) seems to suggest so. 30. I have trouble reconciling your reference that the primary objective of F/S is to provide information to a wide range of users, and then subsequent paragraph references to primary users. I walk away from this document thinking that we have different materiality thresholds for different user groups. If this is the intent, the document should have a section addressing this point. (c) Are there any paragraphs/sections with which you do not agree? If so, which paragraphs/sections are they and why? Not agree paragraphs: 3 & 6. Because Enterprise Risk Management (ERM) and ISO risk-reporting frameworks are so different from GAAP Contingency/Liability frameworks, they are rarely, if ever, , FA , dsavini@ethicquest.com

7 Page 7 DIS available to users on the same terms. The Board should reconsider its position In this regard by ensuring itself that it truly believes there is comparability between risk-reporting and financial statement handling of material items. 9. Internal parties (e.g., Board, directors, employees, etc.) or those related to the entity are also users of the F/S. 31. Judgment should not be limited to just the reporting objective(s) but should also include consideration of the qualitative characteristics and measurement attributes. 43. First sentence. Management considers an item to be material in both qualitative and quantitative terms. Keeping the sentence as-is ignores that qualitative assessments are just as important as those based on numerics. 46. First sentence. Is the Board sure that the concept of materiality does not change when applied to the notes. It seems to me that notes can have a different materiality threshold especially when one considers qualitative assessments. For example, a contingency or risk that is not recognized may need to have a lower (note disclosure) threshold because of the severe consequences or impact that could occur. Also, a lower threshold may be appropriate when stewardship (e.g., sustainability) or accountability are important reporting objectives. 64. The given example about capital expenditures ignores the , FA , dsavini@ethicquest.com

8 Page 8 DIS fact that immaterial amounts may be qualitatively important. The document appears to have a bias towards quantitative assessments while ignoring the importance of qualitative considerations. (d) Do you think any paragraphs/sections are unnecessary? If so, which paragraphs/sections are they and why? Unnecessary paragraph: 16. This paragraph seems superfluous and conflicts with par. 7 and 9. (e) Do you think any aspects of the guidance will conflict with any legal requirements related to materiality within your jurisdiction, or a jurisdiction in which you file financial statements? Yes. U.S. Supreme Court decisions such as TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976) and Basic, Inc. v. Levinson, 485 U.S. 224 (1988), have noted that determinations of materiality require "delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him...." (Emphasis added). As such, I request that the Board consider the following: (a) Delicate Assessments Emphasizing that qualitative assessments are as important as quantitative ones and that immaterial quantum measurements may be qualitatively , FA , dsavini@ethicquest.com

9 Page 9 DIS material. (b) Reasonable shareholder - Clarifying its position as to whom the GPFS are to serve. The document seems to refer back and forth to users and primary users and distinguishes external users from all others. Greater clarity and specificity is needed. (c) Significance Because accounting literature often uses the term significant interchangeably with material, the Board may wish to address this by defining what significant means in the context of materiality assessments , FA , dsavini@ethicquest.com

10 Page 10 QUESTION DIS or N/A Question 4 Timing The IASB plans to issue the Practice Statement before the finalisation of its Principles of Disclosure project. Do you agree with this approach? No. It seems counter-intuitive and counter- productive to issue a document while recognizing that a near-term future project may impact its results. The Disclosures project will provide valuable insight by identifying disclosure overload issues and matters that should have been qualitatively reported. In any event, the practice document as currently structured and written will be marginally helpful at best , FA , dsavini@ethicquest.com

11 Financial Reporting Council and European Financial Reporting Advisory Group. Considering the Effects of Accounting Standards Discussion Paper QUESTION DIS Question 5 Any other comments Do you have any other comments on the [draft] Practice Statement? As mentioned in Question 4, a discussion about the definition of materiality will be included in the Discussion Paper in the Principles of Disclosure project, so the IASB is not asking for comments on the definition at this time. comments can be sent to: commentletters@ifrs.org The accounting profession should align its contingency/liability reporting framework to ERM and ISO risk reporting frameworks. Please note that what is material for risk reporting purposes is often disregarded as being immaterial for financial reporting purposes. In short, the accounting community is risk-averse and often fails to address possible future impact or consequence to an event or condition. If we truly want to identify material items, we need to re-fresh our 1970 s era-based framework and consult with today s risk management experts. I also suggest reaching out to IFAC and see what thoughts they may have concerning this matter. 11 Domenic N. Savini, CPA, CMA, MSA 7702 Mulberry Bottom Lane, Springfield, Virginia USA