The Supreme Court's definition of materiality could take precedence in the future, under a proposal by accounting rule makers.
The definition of what information companies have a duty to share with investors could be changing.
U.S. accounting rule makers are considering throwing out their concept of “materiality”, or the information companies deem important enough for investors to know about, according to a proposal released Thursday. The proposed to align their rule with the definition set by the U.S. Supreme Court.
The Financial Accounting Standards Board receives complaints from companies, investors and auditors stating that the materiality definition is sometimes confusing, or in conflict with the Supreme Court’s standard. Allegations that companies failed to disclose material information, are frequently at the center of securities fraud cases and class actions.
Under the FASB’s current rules, information is considered material if omitting or misstating it could influence investment decisions.
The FASB’s current rules are “inconsistent with the legal concept of materiality,” FASB Chairman Russell Golden said in a statement, adding that this led to uncertainty for companies trying to make decisions about what to disclose.
FASB is seeking comments from the public until Dec. 8.