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The AFM strives for more clarity concerning the application of 'materiality' in financial statements

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The Netherlands Authority for the Financial Markets (AFM) would like there to be more clarity concerning the application of the criterion of 'materiality' in financial statements. This criterion determines whether information should be included in the financial statements.

The AFM feels encouraged by the round table meeting it organised on 30 January. The participants made the appeal to provide more insight why the AFM considers certain shortcomings as material in its regular supervision. The supervisor will take further steps in consultation with all parties including investors. This should provide a contribution to the more consistent application of the concept of materiality in the financial statements.

The European Securities and Markets Authority (ESMA) published a consultation document entitled 'Considerations of materiality in financial reporting' on 9 November 2011. Responses can be sent in until the end of February 2012. Similarly to the ESMA, the AFM observed during its regular supervision of financial reporting that there are different notions concerning the application of the notion 'material interest in financial statements' among those who draw up and use financial statements and accountants.

It became clear during the round table meeting that every party was in favour of proper financial statements, but that there are different opinions concerning the practical application of the concept of materiality. Information in financial statements is 'material' if it could influence investment decisions. The less information financial statements concerns, the harder it will be for an investor to base decisions thereon. The more sizeable the financial statements, the more effort it will take to draw up and audit them. Nor will users necessarily benefit from more information. Parties that draw up financial statements indicated that financial reporting becomes too extensive if all requested information has to be provided. It should not concern more, but better information; it should not be about accounting principles, but system changes and explanations to estimations.Accountants that are involved in the audit of financial statements consider further guidance to be important.

Clarification should primarily come from the International Accounting Standards Board (IASB). There may also be a role for the IAASB, which draws up the international standards for audits (IAASB).

Investors indicated their wish for more insight into the application of the notion of materiality. They consider it important that in this connection the influence of purchase and sale decisions are not the only points of consideration. Materiality also relates to information that is necessary to facilitate the relevant shareholders. The participants in the round table meeting also agreed that materiality has both quantitative and qualitative aspects. Traditionally, the quantitative aspect seems to be assigned more weight in practice. The qualitative aspect, by contrast, seems less known, unloved and underemphasised.

Parties that draw up financial reporting (employers’ association VNO-NCW and companies), accountancy organisations and investors (VEB (Association of Stockholders) and Eumedion) participated in the round table meeting. There were also representatives of the NBA, the Netherlands Institute of Chartered Accountants, the Dutch Accounting Standards Board (DASB), the Ministry of Finance and the Ministry of Security and Justice. Members of the AFM’s Committee on Financial Reporting also participated in the meeting.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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