As we move towards the year-end reporting process one of the issues many of us, if not all of us, will have to deal with is materiality. Determining whether a particular issue or amount is material is not a simple question. When we decide that something is immaterial the SEC staff sometimes wants to “kick the tires” on that judgment.

Here is an example comment:

Note 1. Summary of Significant Accounting Policies, page 64

1. Please tell us in greater detail the facts and circumstances regarding the corrections to prior year’s income taxes and depreciation of properties. In your response, tell us how you complied with ASC 250-10-45-22 and SAB Topics 1M and 1N, and provide us with your materiality assessment. Please be detailed in your response.

This is a great example of finding an issue that affects prior years and deciding the issue is not material to the prior year or the current year. With that decision a restatement is not necessary.

In their comment the staff is not saying they disagree. But they do want to look more deeply into the judgments involved.

Those of course involve SAB Topic 1M, originally SAB 99 and the issues surrounding quantitative and qualitative materiality, along with Topic 1N, originally SAB 108, which requires evaluation of both the “roll-over” and “iron curtain” methods of evaluating the materiality of a misstatement.

You can find both of the SAB’s in the SAB Codification at the SEC’s website:

 www.sec.gov/interps/account/sabcode.htm

Here are two issues to be sure you deal with in your materiality memo.

First, SAB 99 provides a list of example issues that could make a quantitatively small amount qualitatively material. One “mistake” that companies still make is to view the list of qualitative factors in the SAB as a complete list. One of the worst flaws in a SAB 99 memo can be to list the factors in the SAB and conclude none of them apply and conclude the issue or amount is not material. You must go beyond this list and evaluate whether any other factors make the amount qualitatively material.

Second, and likely the most important advice in every materiality decision, is ALWAYS write your SAB 99 memo when you make the decision, don’t put yourself in a position of having to write it well afterwards!

As always, your thoughts and comments are welcome!