Materiality in Corporate Reporting: Moving Beyond the Numbers

Materiality is one of the fundamental concepts underpinning financial and corporate reporting, but its application is not simply a matter of selecting a numerical threshold.

Recent work by the Financial Reporting Council (FRC) has placed renewed emphasis on how boards and management apply materiality across corporate reporting. Its work focuses on a practical question: how can companies distinguish information that genuinely matters to users of their reports from information that adds volume without improving understanding?

The issue is increasingly relevant as annual reports have become broader and more complex. Financial information now sits alongside extensive narrative, strategic, risk and, for many businesses, sustainability-related reporting. In that environment, effective materiality judgements can help companies produce reporting that is not merely compliant, but focused and decision-useful.

Materiality is a matter of judgement

Materiality is well established within accounting and reporting frameworks.

Under IFRS Accounting Standards, information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions made by the primary users of general purpose financial statements.

The practical significance of that definition is that materiality cannot be determined solely by applying a fixed percentage to profit, revenue, net assets or another financial measure.

Quantitative thresholds can be useful. They provide a framework for assessing the significance of transactions, balances and errors. But the nature and circumstances of information may make it material even where the amount involved is comparatively small.

This requires judgement.

A transaction involving a related party, a breach of a contractual or regulatory requirement, an unusual change in accounting treatment or information affecting how users understand a significant business development may warrant particular attention irrespective of whether it exceeds a conventional numerical threshold.

Conversely, reporting more information does not necessarily produce better reporting. Information that is immaterial can make significant matters more difficult to identify and understand.

From financial statements to the annual report as a whole

One of the useful aspects of the FRC’s work is its focus on materiality beyond individual financial statement disclosures.

Boards and management determine a wide range of financial, narrative and other information included within annual reports. The FRC encourages companies to consider materiality more holistically rather than treating financial, strategic and other reporting as entirely separate exercises.

This is particularly relevant to the strategic report.

For companies required to prepare one, the Companies Act 2006 requires the strategic report to provide a fair review of the company’s business and a description of its principal risks and uncertainties. The required analysis depends on the nature and circumstances of the company, with additional requirements applying to certain categories of company.

The FRC’s February 2026 Guidance on the Strategic Report reinforces the importance of materiality in determining what information should be communicated and how it should be presented.

This creates an important reporting discipline. The objective is not necessarily to include every potentially relevant fact. It is to identify the information necessary for users to understand the business, its performance, position, strategy and significant risks.

Quantitative thresholds tell only part of the story

In its research, the FRC identified three broad lenses through which companies commonly approach materiality:

• quantitative financial thresholds;
• qualitative financial considerations; and
• sustainability-related information.

These approaches can be useful, but difficulties arise when they operate independently.

A purely quantitative exercise may overlook information whose importance arises from its nature rather than its monetary value. Equally, narrative reporting based largely on an informal perception of what appears important may lack sufficient structure and challenge.

A more connected assessment considers how financial performance, strategy, operations, risk and other relevant matters interact.

For example, an operational development may initially appear primarily narrative. If it affects forecasts, impairment assessments, provisions, financing arrangements or the company’s future cash flows, however, it may also have consequences for the financial statements.

Likewise, a matter identified through financial reporting may require explanation elsewhere in the annual report if the numbers alone do not adequately communicate its significance.

Consistency between the different components of corporate reporting therefore matters.

Reporting should reflect how the business is actually managed

Materiality assessments are strongest when they are grounded in the company’s circumstances rather than approached primarily as a disclosure exercise.

The information presented externally should have a coherent relationship with the matters receiving attention internally.

Boards and finance teams may therefore find it useful to compare proposed reporting with matters such as:

• board discussions;
• budgets and forecasts;
• risk registers;
• performance indicators; and
• significant operational developments.

If an issue is receiving substantial board attention but is largely absent from external reporting, it may be appropriate to consider whether the report adequately communicates the company’s position. Conversely, extensive disclosure of matters that have little connection with the company’s strategy, performance or principal risks may make the report less focused.

This does not mean that internal priorities determine materiality automatically. Reporting requirements and the information needs of primary users remain central. It does, however, provide a useful challenge to whether the annual report presents a coherent picture of the business.

Materiality should not become a disclosure checklist

Increasing reporting requirements can create a natural tendency towards inclusion: where there is uncertainty, additional disclosure can appear safer than removing information.

But excessive disclosure carries its own risks.

Repeated boilerplate language, long lists of generic risks and disclosures that are no longer relevant can obscure information that genuinely matters. Materiality therefore involves considering not only whether information should be added, but whether existing information remains necessary and appropriately prominent.

The FRC’s approach is particularly useful in this respect. It encourages companies to review, rank and, where appropriate, remove information that does not contribute meaningfully to users’ understanding.

This should not be confused with using materiality to avoid mandatory disclosure. Certain information must be provided because legislation, regulation or the applicable reporting framework requires it irrespective of a company’s broader materiality assessment.

The starting point remains compliance with the applicable requirements. Materiality then assists companies in exercising judgement where those requirements permit or require it.

Management materiality and audit materiality are not the same exercise

The distinction between corporate reporting materiality and audit materiality is also important.

Management and the board apply materiality when determining how the company’s financial and other corporate information should be prepared and presented.

Auditors apply materiality for a different purpose: planning and performing the audit and evaluating identified misstatements in the context of the financial statements.

There may naturally be interaction between the two. Management will often be aware of the auditor’s materiality assessment, and audit committees may discuss materiality extensively with the external auditor.

However, the auditor’s materiality figure should not simply become management’s reporting threshold.

Management retains responsibility for the financial statements and corporate reporting and must make its own judgements about what information is material in the company’s particular circumstances. Qualitative factors may make information significant even when the amount concerned falls below a quantitative audit threshold.

Keeping those responsibilities distinct is particularly important where difficult disclosure or presentation judgements arise.

Governance and controls around materiality

Materiality is ultimately a judgement, but that does not mean the process should be informal or undocumented.

For more complex businesses, effective materiality assessments may involve input from several functions. Finance may understand the financial consequences of an issue, while operational, legal, HR, commercial or other teams may identify developments that affect how that issue should be understood.

Bringing those perspectives together can help identify inconsistencies and gaps before reporting reaches its final stages.

There is also a role for appropriate governance and challenge. Audit committees and boards can consider whether the significant matters identified through the reporting process correspond with their understanding of the business and whether the annual report gives appropriate prominence to those matters.

Documentation is equally important, particularly for difficult or borderline judgements. Recording why information was regarded as material or immaterial can support consistency, facilitate review and provide a clearer basis for discussions with auditors and advisers.

Practical considerations for finance teams and boards

Materiality should ideally be considered throughout the reporting process rather than shortly before the annual report is finalised.

Companies may benefit from beginning with the matters that genuinely drove the business during the reporting period: significant transactions, changes in performance, financing developments, emerging risks, strategic decisions and changes in the external environment.

Those matters can then be assessed against the applicable financial reporting and statutory requirements and the information needs of users.

Companies should also consider connectivity:

• Do the financial statements, strategic report and other narrative reporting tell a consistent story?
• Are significant risks reflected appropriately in the discussion of strategy and performance?
• Are important financial developments adequately explained rather than merely disclosed numerically?

Finally, the assessment should remain current. Materiality is company-specific and time-sensitive. A matter that was peripheral in one reporting period may become significant in the next because the business, its financial position or the external environment has changed.

Better reporting rather than simply more reporting

The FRC’s work on materiality does not create a new reporting requirement. Its significance lies instead in encouraging boards and management to make fuller use of a concept already embedded throughout corporate reporting.

Effective materiality judgements can help companies move away from annual reports driven predominantly by accumulation and towards reporting that identifies, connects and explains the matters that users genuinely need to understand.

That requires more than applying a percentage to a financial benchmark. It requires an understanding of the business, its users, its risks and its reporting obligations, supported by appropriate governance and professional judgement.

For boards and finance teams, the practical question is therefore not simply whether an item crosses a numerical threshold. It is whether omitting, misstating or obscuring the information could change how users understand the company and make decisions on the basis of its reporting.

This article is intended as general information only and does not constitute accounting, audit, legal or other professional advice. Reporting requirements and materiality judgements depend on the applicable reporting framework and the particular facts and circumstances of the company.