Significance of Materiality in Sustainability Reporting

Hello!

Thank you as always for maintaining the forum.

I was working on one of the past papers for AAA in Sept/Dec24, and came across this 5 marks question for sustainability reporting.

The question specifies that no exhibit is needed to answer, so I have copied the question and answer over for your reference.

(a) Discuss how materiality is a significant issue for assurance firms when performing engagements providing assurance on sustainability information. (5m)

This is the sample answer provided on the ACCA platform:

– ED 5000 and double materiality –
– Aim of new proposed standard –
Part of the aim of the new proposed International Standard on Sustainability Assurance 5000 (ED 5000) is to respond to the need for a standard which supports the consistent performance of quality sustainability assurance engagements which can be applied across all sustainability topics and reporting frameworks.

– Concept of double materiality –
When developing the proposed standard (ED 5000), the IAASB has considered the concept of double materiality in the preparation of sustainability information. This means there is a consideration of the significance of the impact of sustainability matters on the organisation, as well as the significance of the impacts of the business activity on the outside world. Some stakeholders will be interested in the financial impact of sustainability matters on the entity (often referred to as financial materiality), while others will be concerned about how the entity impacts on sustainability matters (referred to as impact materiality).

ED 5000 considers this requirement when providing assurance on that sustainability information, to ensure the assurance provided can adequately assist the decision-making process of a wide range of users.

Where the concept of double materiality is relevant, the assurance practitioner should consider both financial and impact materiality when determining their materiality level for the purposes of planning and performing the engagement. It should be noted that the IAASB’s view is that it will not be relevant to every engagement.
ED 5000 requires that the assurance practitioner should adopt a different approach for quantitative and qualitative disclosures and the IAASB has offered additional guidance on how to determine materiality where both financial and impact materiality apply:

– Quantitative disclosures –
For quantitative disclosures, materiality relates to the magnitude of misstatements relative to the disclosures and similar to other assurance engagements may be determined by applying a percentage or benchmark to the reported metric.
The practitioner should also set a performance materiality level to minimise the risk of the aggregate of misstatements exceeding the materiality level. The IAASB states that where double materiality is relevant, the lesser of financial or impact materiality should be used as that would be the level which is material to the intended users or other stakeholders.

– Qualitative disclosures –
Qualitative disclosures by their very nature will be more subjective and a key consideration for the assurance practitioner is whether the disclosures are accurate and complete. Assurance practitioners need to consider whether the disclosures omit information which is pertinent to user understanding. They should also assess whether they include information which could obscure the presentation of the disclosures.

The practitioner should also consider a range of other factors such as whether a potential misstatement could affect compliance with law or regulation, or the overall number of people or stakeholders affected by the matter. ED 5000 offers detailed guidance over the matters which should be considered when determining materiality for qualitative disclosures.

– Conclusion –
Embedding the concept of double materiality into ED 5000 should ensure that the assurance practitioner appropriately considers the information needs of the intended users and give more robust assurance on the suitability of the reporting criteria which have been selected by the reporting entity.

My question is that:

I don’t understand how the sample answer is answering the question.
From what I am reading, the sample answer is merely info-dumping on ED5000, by just stating what the ED5000 is about and what the standard suggests to do.

The question is asking how materiality is significant to auditors during their engagement. I was expecting answers like:
(1) lack of financial benchmark for gas emissions, etc, that a lower materiality threshold is used to ensure sensitive information is picked up.
(2) Double materiality is significant to report the two types of information that stakeholders are interested in (financial impact & entity’s impact on sustainability)

However, the sample answer is written differently, and I am struggling to understand why was it structured like a textbook answer of ED5000, especially AAA always mentions to explain the impact and not just showing pre-learned knowledge.

Please can you share some insights?

Thank you.