Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of financial statements. Although the topic is approached in different terms, it is generally explained that:
- Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements;
- Judgments about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both; and
- Judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group. The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered.
Determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen point of reference as a starting point in determining materiality for the financial statements/INREV NAV as a whole.
In the case of a regulated vehicle, the determination of materiality for the financial statements/adjusted NAV, INREV NAV as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances, INREV NAV adjustments or disclosures) is/might therefore be influenced by law, regulation or other authority.
Based on circumstances a fund manager could assess if there is a need for a materiality. The materiality could be used to decide not to include certain adjustments.
Since assessing materiality levels might be a complex exercise, INREV recommends to request the auditor of the vehicle what the specific materiality is that he is using for the audit of the financial statements as a whole.
If a fund manager for what so ever reason does not want to include one or more adjustments, the impact on the total INREV NAV should be assessed as a whole. Leaving out one or more individual immaterial adjustments can sum up to a total material error
Further guidance on determining materiality can be found on the website of www.ifac.org.
If the fund manager decided not to include an adjustment, since he expects that leaving out that adjustment should not have a material effect on the INREV NAV in total, proper disclose should be provided.
The fund manager shall include in the disclosure notes to the INREV NAV calculation sufficient background of his decision and the following amounts and the factors considered in their determination:
- Which adjustments are not included as a result of materiality;
- What the rational is for not included these adjustments;
- A statement that in the opinion of the fund manager not including the(se) adjustment(s) does not have a material effect on the INREV NAV as a whole;
- If applicable, the materiality level or levels for particular classes of transactions, account balances, INREV NAV adjustments or disclosures