Accounting

AICPA Adopts New Definition of Materiality

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In December 2019, the Auditing Standards Board (ASB) issued Statement on Auditing Standards No. 138, Amendments to the Description of the Concept of Materiality (SAS 138), which amends the definition of materiality. SAS 138 is effective for audits of financial statements for periods ending on or after December 15, 2020. This effective date coincides with other significant new audit standards, such as the change in the form and content of audit reports of nonpublic entities.

In August 2018, the Financial Accounting Standards Board (FASB) amended its definition of materiality to be more consistent with the U.S. judicial system, the Public Company Oversight Board (PCAOB), and the Securities Exchange Commission (SEC). Yet, the ASB continued to maintain a definition of materiality that was converged with the one used by the International Accounting Standards Board (IASB). Now, the definition of materiality used in all financial statement audits in the United States will be converged with relevant U.S. standard-setting, regulatory, and judicial bodies.

The old definition in the SASs is:

Misstatements, including omissions, are considered to be material if they individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users on the basis of the financial statements.

The new definition in the SASs is:

Misstatements, including omissions, are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

The foundation of the new materiality definition lies in the 1976 U.S. Supreme Court decision TSC Industries, Inc. v. Northway, Inc. which opined that an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would(not could) consider it important in deciding how to vote.