Strategic Business Reporting (International) · Other reporting issues

IFRS Practice Statement 2: Materiality and Management Commentary for ACCA SBR

Updated 11 October 2026 · Fact-checked

Practice Statement 2 gives non-mandatory guidance on making materiality judgements in financial statements. Information is material if omitting, misstating or obscuring it could reasonably influence primary users' decisions. The Management Commentary Practice Statement guides narrative reporting that helps users assess the entity's prospects. In SBR you apply both to scenarios.

Understand IFRS Practice Statement 2 Materiality and Management Commentary

Materiality is an entity-specific judgement. It is not a fixed percentage. IFRS Practice Statement 2 *Making Materiality Judgements* helps preparers decide what to include in the financial statements and notes. It is guidance only. It does not add requirements to IFRS Standards.

The definition comes from IAS 1 and IAS 8. Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users make on the basis of the financial statements. Primary users are existing and potential investors, lenders and other creditors. Obscuring matters: burying a key item in clutter, or using vague wording, can have the same effect on users as omitting it. The information is still material, but users cannot use it because it is hidden.

The Practice Statement describes a four-step process. First, identify information that could be material, using the requirements of IFRS Standards and the needs of primary users. Second, assess whether that information is material, considering both quantitative and qualitative factors. Third, organise the information within the draft statements so it is clear and not obscured. Fourth, review the draft as a whole to check that all material information is included and that the overall picture is understandable.

Quantitative factors look at size relative to measures such as profit, revenue or assets. Qualitative factors include the nature of the item. Examples are a transaction with a related party, a change in trend, an item affecting covenant compliance, or an item linked to a key risk or to management remuneration. A small number can be material because of its nature. A large number can be immaterial if it would not affect decisions. Materiality is assessed for each item and in aggregate. Where an IFRS Standard requires a disclosure, the entity may omit it if the information is immaterial.

The IFRS Practice Statement 1 Management Commentary is also non-mandatory. The IASB issued a revised Practice Statement 1 in 2025 to replace the 2010 version. Check the published document for its effective date and any early application rules. Also check the current SBR syllabus and your study material for how it is examined. It is a framework for narrative reports that accompany financial statements. Its purpose is to help users assess the entity's prospects. It takes a materiality-based approach: the commentary should focus on material information about matters that could affect those prospects, not on everything management could say.

Confirm the exact content areas and objective wording against the published document. The 2010 version used different headings from the revised one, so do not mix the two lists in one answer. In general, a sound commentary explains the business and its strategy, the resources and relationships it depends on, its risks, and its performance and position. Local law or regulators decide whether management commentary is required. In the exam, expect scenarios that ask you to judge the materiality of an item or to assess whether a report gives users material information about prospects.

Key rules to remember

Definition of material information: Material if omitting, misstating or obscuring it could reasonably be expected to influence primary users' decisions; Primary users are existing and potential investors, lenders and other creditors. Quote this wording in answers.
Four-step materiality process (PS 2): Identify → Assess → Organise → Review; Use these as headings in a written answer and apply each to the scenario.
Quantitative assessment: Item ÷ benchmark (profit, revenue, assets) = relative size; Percentages used in practice are only rules of thumb. Do not treat any percentage as a rule.
Management commentary purpose and approach (PS 1): Help users assess the entity's prospects; focus on material information about matters that could affect those prospects; The IASB issued a revised Practice Statement 1 in 2025. It is non-mandatory. Confirm the exact objective wording and effective date in the published document.
Management commentary content headings: Use the headings in the current published Practice Statement 1 and your SBR study material. 2010 version (older): nature of the business; objectives and strategies; resources, risks and relationships; results; performance measures; Confirm the current list before the exam and do not mix the two lists. Use the headings as a checklist to find gaps, and cover only what is material to prospects.

How to solve IFRS Practice Statement 2 Materiality and Management Commentary questions

Use this method for any question on materiality or management commentary. Link every point to the scenario facts and to the needs of primary users.

1Read the requirement. Decide if it asks for a materiality judgement, a critique of a report, or advice on disclosure.
2State the test: omission, misstatement or obscuring could influence primary users' decisions. Name the primary users.
3Identify the items in the scenario that might be material. Include items that are small in size but sensitive in nature.
4Assess each item. Give the quantitative size against a sensible benchmark, then the qualitative factors such as related parties, trend change, covenants, legal breach or remuneration.
5Consider aggregation. Several small items of the same type may be material together.
6For commentary, compare the report with the objective of the revised Practice Statement 1 and its content areas. Say what material information about prospects is missing, biased or not linked to the financial statements.
7Conclude with a clear recommendation: include, disclose, rewrite or omit. Say why.
8Add professional skills: sceptical challenge, commercial insight and clear communication to the audience stated.

Quickest way: Size, nature, users

When to use it: Use when time is short and you need a defensible conclusion on one item quickly.

Write the definition in one line.
Size: compare the item with profit, revenue or assets. Give the percentage.
Nature: ask if it involves related parties, legal breach, covenants, trend change or management pay.
Users: ask if lenders or investors would change a decision.
Conclude and recommend. For commentary, ask what material information on prospects is missing, and scan the content areas for gaps.

Common mistakes in IFRS Practice Statement 2 Materiality and Management Commentary

Applying a fixed percentage such as 5% as the rule for materiality.
Students remember audit rules of thumb and treat them as law.
Fix: Say a percentage is only a starting point. Always add qualitative factors and the effect on users.
Saying Practice Statement 2 is a mandatory standard.
The title sounds like an IFRS Standard.
Fix: State that it is non-mandatory guidance. It does not change the requirements of IFRS Standards.
Treating small items as automatically immaterial.
Students look only at the number.
Fix: Check nature. A small related-party payment or a breach of a loan covenant can influence decisions.
Ignoring the idea of obscuring information.
Students think materiality only means leave out or include.
Fix: Mention that vague wording, scattered disclosures and clutter can hide material information. Recommend clearer organisation.
Describing management commentary in general terms without using the scenario.
Students memorise the content areas and list them.
Fix: Pick the content areas that the scenario leaves out or handles badly. Say what material information about prospects is missing and suggest a specific improvement.
Assuming immaterial items must always be removed, or that a required disclosure must always appear.
Students overstate the rule.
Fix: Say an entity need not give a specific disclosure if the information is immaterial. Also say it may still choose to if useful, but it should not obscure material information.

Worked examples

Example 1

Zenith plc has profit before tax of $4,000,000. It has made a loan of $60,000 to a director on non-commercial terms and has not disclosed it. The finance director says it is only 1.5% of profit and so is immaterial. Advise whether the item is material under Practice Statement 2.

Show the solution

Test: information is material if omission could reasonably influence primary users' decisions.
Size: 60,000 ÷ 4,000,000 = 1.5% of profit. This is small.
Nature: it is a related-party transaction with a director on non-commercial terms. Users use such information to judge governance and management integrity.
Qualitative factors can make a small item material. Related-party transactions are a clear example.
Conclusion: the 1.5% size alone does not decide the question. The loan is likely to be material by nature and should be disclosed.

Answer: The loan is likely to be material because of its nature, even though it is only 1.5% of profit before tax. It should be disclosed. The finance director should not rely on size alone.

Example 2

Orion Ltd's annual report includes a management commentary of two pages. It lists last year's revenue and profit, praises management, and says nothing about strategy, risks or the outlook. It does not refer to the financial statements. Evaluate the commentary against IFRS Practice Statement 1, using the content headings from the version in your study material.

Show the solution

Purpose: the commentary should give users material information that helps them assess the entity's prospects. Praise of management does not do this.
Performance and position: this is the only theme covered, and only in part. It gives revenue and profit but no explanation of what drove them or how they link to the financial statements.
Business and strategy: the commentary does not explain what Orion does, how it creates value or where it is heading, so users cannot judge its prospects.
Resources and relationships: there is no discussion of the resources and relationships that Orion depends on.
Risks and external factors: there is no discussion of risks or of external factors that could affect prospects. These are likely to be material matters.
Balance: it praises management and says nothing about weaknesses or risks, so users get a one-sided picture.
Recommend: focus on material information about matters that could affect prospects. Add the business and strategy, resources and relationships, principal risks and how they are managed, and an explained, balanced discussion of performance linked to the financial statements. Map each point to the headings in the version you are examined on.

Answer: The commentary does not meet the purpose of Practice Statement 1. It covers performance only thinly and omits the business and strategy, resources and relationships, and risks. It is also one-sided and not linked to the financial statements. It should be rewritten to give balanced, material information on prospects.

Exam tips

Always quote the definition of material and name the primary users.
Give both a number and a qualitative factor. Examiners reward the combination.
Use the four steps as a frame for longer answers and keep each tied to the scenario.
In commentary questions, pick the themes the scenario leaves out and link them to material information about prospects. Do not list every heading. Use the headings from the current Practice Statement 1 and your SBR study material.
State that both Practice Statements are non-mandatory, then give a clear recommendation to earn professional skills marks.

Practice questions from Other reporting issues

IFRS Practice Statement 2 Materiality and Management Commentary: frequently asked questions

Is IFRS Practice Statement 2 mandatory?

No. It is non-mandatory guidance. It helps preparers make materiality judgements but does not add to the requirements of IFRS Standards.

Is there a percentage threshold for materiality?

No. A percentage of profit or revenue can be a starting point, but it is not a rule. You must also consider qualitative factors and what users would need.

What are the four steps in the materiality process?

They are identify, assess, organise and review. You identify possible material information, assess it, organise it clearly, then review the whole draft.

What is management commentary?

It is narrative reporting that accompanies the financial statements. It gives management's view of the business, its strategy, risks, performance and prospects. The Practice Statement is a non-mandatory framework.