Please provide an essay type answer for the questions below: How should material

Question

Please provide an essay type answer for the questions below:

How should materiality be applied? FASB weighs By Ken Tysiac September 24, 2015 See more athttp: //wwwjourmalofaccountancy.com/news/2 2015 FASB issued two exposure drafts Thursday that address the use of materiality an attempt to help organizations eliminate unnecessary disclosures in financial statements. Feedback received by FASB indicated that the current discussion of materiality in the board's conceptual framework is inconsistent with the legal concept of materiality established by the U.S. Supreme Court FASB Chairman Russell Golden said in a news release. That created uncertainty about organizations ' abilities to interpret which disclosures are material, as well as FASB's ability to identify and evaluate disclosure requirements in accounting standards, according to Golden. “These proposals are intended to clarify materiality, which will help organizations improve the effectiveness of their disclosures by omitting immaterial information, and focus communication with users on the material, relevant items, " Golden said. The proposals are part of the disclosure framework project FASB is undertaking to improve the effectiveness of disclosures in notes to financial statements. The proposals address the use of materiality in two ways: • Helping organizations use discretion when determining which disclosures in notes to financial statements should be considered "material, and • Helping FASB understand the reporting environment in which it sets accounting and reporting One of the exposure drafts issued Thursdayproposes amendments to Chapter 3 of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting, and is intended to clarify the concept of materiality. The other exposure draft, Proposed Accounting Standards Update, Notes to Financial Statements (Topic 235): Assessing whether Disclosures are Material, aims to promote the appropriate use of discretion when organizations decide which disclosures they should consider material. The amendments to ASC Topic 235 would apply to all types of organizations public and private companies, not-for-profits, and employee benefit plans In a 2012 comment letter replying to a FASB discussion paper, James G. Campbell, Intel's vice president for finance and corporate controller, wrote that disclosure effectiveness requires application of materiality. The letter said the appropriate threshold for materiality is consistent with the Supreme Court's interpretation of materiality, and that FASB Concepts Statement No. 8's discussion of materiality can lead organizations to a threshold that is too low and exacerbates disclosure overload. "Materiality assessments for disclosures are not occurring as often as they should." the letter said. A 2012 comment letter from the American Gas Association encouraged FASB to clearly define materiality and relevance with a focus on limiting disclosures in financial statement notes.

Explanation / Answer

Auditors are likely to adopt the following changes in their approach to disclose material items.

1. Auditors would approach the regulators through their body to make necessary amendments in the law in such a way that the Board of Directors of the company have to certify that no material disclosures are left out in their finnacial statements. As FASB intends to give more liberty to the companies in deciding the material instances, it also should hold the directors responsible for the same.

2. To ensure that material disclosures are not ignored, auditors may identify, as a part of their audit process, the list of events/transactions which in their opinion is material in nature and would be essential for informing the investors. Then they would choose to discuss with the CEO/CFO of the company and seek explanations from them. Wherever there is a conflict in determining materiality between CEO/CFO and auditors, they could insist on a written explanation. Those exceptions would be presented to the audit committee Board and their views would be taken in finalising the disclosure in financial statements.

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