Missing Relevant Disclosures or too much Irrelevant Disclosures: A case study on the concept of materiality

Abstract: One of the primary objectives of financial reporting is to provide users with useful information for decision-making. Standard-setters, such as the IASB, have therefore added to disclosure requirements in attempts to increase the level of transparency. However, transparency comes with a cost and information overload is a current perception of the outcome. The disclosure problem is the result of poor application of the concept of materiality. The underlying challenges are that there is not enough relevant information, too much irrelevant information, and that the communication of information is poor. As a consequence, entity-specific information is lost, and users view disclosures as generic and boilerplate. To show how materiality is applied in practice, this study investigates the reasoning behind disclosure decisions in financial statements. Since materiality is entity-specific, a case study in a single organization is performed. Further, this study employs both a qualitative and quantitative approach with interviews and an investigation of financial statements. While the interviews show the reasoning behind disclosure decisions, the aim of the investigation of financial statements is to show the outcome and development of disclosures. The findings of this study show that several determinants impact disclosure decisions. These are the materiality of items, internal and external actors, disclosure requirements from accounting standards, unchanged assumptions, and how information is constructed in other firms and accounting standards. These determinates impact disclosure decisions differently due to an underlying cost-benefit approach undertaken by firms. However, the findings indicate that this might have a negative impact on disclosure quality since the cost-benefit approach is conducted at the cost of the best reflection of the underlying economic situations at firms. This, in turn, questions the strength of enforcement in principles-based standards. The findings also show that the amendments to IAS 1 have impacted the preparer’s disclosure decisions and resulted in a decrease of copied words from IFRS. However, the general view on IASB’s work on materiality is mixed. A question is raised and remains unanswered; whether an entity-specific concept such as materiality can, or should, be defined. Instead, the study shows a need for clarification on the purpose of financial statements and its users.