Applying materiality in corporate reporting

Published: 29 July 2026

This page sets out the FRC’s insights on materiality in corporate reporting. This is intended to help preparers, investors and other primary users of UK annual reports understand how materiality applies to corporate reporting. The page includes frequently asked questions and an illustrative process intended to help entities develop their own process for applying materiality when preparing annual reports.

1. Why does materiality matter?

Materiality is a fundamental concept in reporting frameworks and a practical tool that helps entities focus on the most important issues for the business and for the primary users of their annual reports. When preparing annual reports, the directors of a company need to consider what information is material and communicate that clearly to users. There is a risk that including information that is not material, and not a specific requirement of law or regulation, obscures more important information, making it less decision-useful.

Not everything is material and it is up to the judgement of the directors to decide what information to disclose in the annual report. Although users can ask the directors to include more information and greater disclosure, ultimately that is a matter for the directors. In recent years we have observed that more and more information has been treated as if it were material which cannot always be the case.

Annual reports are intended to serve as a communication tool between entities and their investors. They are supposed to comprise decision-useful information, assembled in a way that makes that information accessible to users. Over time annual reports have become longer and more complex as a result of increasing information demanded by investors and growth in legal and regulatory reporting requirements. In this context and to achieve high-quality, decision-useful reporting, it is important that entities make good materiality judgements in deciding what information to include in their annual reports and what to exclude.

Boards understand the key value drivers of their business, which means they are well positioned to apply materiality in practice and evaluate what information will meet users’ needs.

Key points

• Applying materiality well helps focus annual reports on the information that matters most and improves communication with primary users.
• Immaterial information can obscure important messages and make annual reports less useful for primary users.
• Directors are responsible for making judgements about what information is material.

2. Frequently asked questions on applying materiality in corporate reporting

2.1 How is materiality defined for UK annual reports?

The exact definition of materiality, or material information, can vary subtly depending on the reporting framework and the type of reporting.^[1] However, for UK annual reports overall, the following general concept applies:

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the shareholders and other primary users take on the basis of the annual report as a whole.

This means that materiality is entity-specific and judgemental. What information is material will vary between entities and changes over time. Directors make materiality judgements taking into account the information needs of shareholders and other primary users who are the target audience of UK annual reports.

2.2. Does materiality apply throughout the annual report?

Yes. Materiality applies to transactions, balances, disclosures and commentary throughout the annual report, not just transactions affecting the financial statements. Materiality judgements are relevant to decisions about how items are recognised, measured, presented and disclosed, and how errors are corrected.

Requirements in reporting standards usually only need to be applied if their effect is material, and in general only material information should be included in the annual report. Immaterial information should be excluded from the annual report as it may obscure material information, except in the case of certain legal or regulatory disclosure requirements that are mandatory regardless of materiality. In such cases, entities may still have room to consider the appropriate level of detail to disclose, which may be influenced by materiality.

If additional immaterial information is included in the annual report, considering where it is located and how it is presented can also help avoid obscuring material information. For example, if an entity provides additional details or information targeted at other stakeholders in addition to primary users (such as additional sustainability-related disclosures), that information could be presented separately from material information targeted at primary users; separate headings or other formatting solutions could also help to distinguish it from material information.

Materiality judgements for information in the financial statements can differ from those relating to narrative reporting in the rest of the annual report, including the strategic report, due to the nature of the information and the objectives of the applicable reporting requirements. Different factors may be considered and the outcome may be that different types of information and different levels of detail are disclosed in different parts of the annual report.

2.3. Who is the target audience of the annual report?

Under company law, the purpose of the annual report in the UK is to inform shareholders. UK entities should also consider the information needs and decisions made by other existing and potential investors, lenders and other creditors, referred to as the primary users under various applicable reporting frameworks and standards.

The annual report is not intended to meet all stakeholder information needs. Other stakeholders, such as customers or employees, may also wish to use information in the annual report. Information aimed at these other users should generally be reported outside the annual report unless it is also material to shareholders and other primary users.

The focus on the needs of primary users and financial implications means that the UK corporate reporting framework is based on financial materiality. Some other jurisdictions and sustainability reporting frameworks refer to double materiality which also involves considering the impacts on and interests of stakeholders more widely.

2.4. Is all information requested by primary users material?

Not necessarily. Material information in the annual report addresses the common information needs of primary users, not everything that might be of interest to individual investors or users. These common information needs relate to decisions about allocating resources to the entity and assessing the directors’ stewardship.

Different types of primary users may have different information needs and interests. They may also have different levels of access to and ability to demand information directly from the entity.

For example, lenders issuing debt instruments with specific terms or covenants are likely to have a specific interest in understanding compliance with those terms and may separately require detailed reporting from entities. Such information is not necessarily material for the annual report. The level of detail on covenant compliance to address the common information needs of lenders as primary users depends on a number of factors. The entity would consider, for example, the applicable reporting requirements, the significance of the financing to the entity’s financial position, the likelihood and consequences of breaching the terms or covenants, the level of uncertainty, exposure to liquidity risks, and other factors considered as part of assessing going concern and long-term viability.

2.5. What determines whether information is material?

Entities decide what information to disclose, including the level of detail, after considering:

• the applicable reporting requirements;
• the particular circumstances of the business; and
• the primary users’ information needs.

Materiality judgements depend on both qualitative and quantitative factors, the nature of the matter, and the context and circumstances of the business.

2.6. How do quantitative and qualitative factors affect materiality?

Materiality judgements depend on both quantitative and qualitative factors. Information about an item that is quantitatively immaterial may be material due to qualitative factors.

Entities may set a monetary threshold for assessing the impact of a transaction or event on the entity’s financial performance, position and future prospects. Such thresholds could be based on measures such as a percentage of revenue, profit before tax or a balance sheet ratio, depending on the nature of the business and what primary users are most interested in. Lower thresholds could be set for specific areas depending on nature or context. Deciding on the appropriate benchmark and amount involves judgement, and it is important for entities and directors to understand and challenge the assessment.

Qualitative factors are entity-specific or external characteristics that make information more likely to influence primary users – for example, the involvement of a related party, unusual transactions, matters affecting compliance with debt covenants, unexpected trends, and features of the industry or external environment in which the entity operates, including those that affect risk or may affect future prospects.

Materiality judgements relating to narrative and sustainability reporting are often more influenced by qualitative factors due to the nature of the information reported and different time horizons. Assessing the relative importance of an issue to the entity’s development, performance, position or future prospects, including the entity’s business model and strategy, drives decisions about what information to include in the strategic report.

2.7. How do connectivity and coherence in reporting relate to materiality?

An annual report should tell a holistic, coherent and consistent story of the business, highlighting and explaining linkages between related matters and related pieces of information.

Strong connectivity helps make material information in the annual report understandable and credible for users. Users often want to understand how information that has been identified as material in one part of the annual report has been reflected elsewhere. Any inconsistency or lack of connectivity between related disclosures in different parts of the annual report can raise concerns about the adequacy and appropriateness of information in the annual report.

For example, users may want to understand how principal risks may affect the entity’s business model and strategy, and any implications on financial performance and position, either in the current period or in the future.

Some reporting standards include requirements intended to promote connectivity. For example, some sustainability reporting standards require disclosures about the effects of sustainability‑related risks on the entity’s business model, strategy and financial statements, including effects in the current period and anticipated effects in the future.

More generally, connectivity can be enhanced by:

• providing consistent disclosures, including consistent terminology, metrics and assumptions, throughout the annual report;
• explaining or reconciling any differences or apparent inconsistencies between related disclosures; and
• highlighting linkages in different ways, for example, by using cross-referencing, signposting, hyperlinks or icons.

2.8. Why might preparers and users have different views as to what information is material?

There can be differences in the views of preparers and expectations of users as to what is material and how much information can or should be disclosed.

The views of both preparers and users are considered in the development of accounting standards and other corporate reporting standards (such as those issued by the FRC and the IFRS Foundation). Accounting standards applicable in the UK are principles-based and judgement is required in applying them: the requirements do not apply if the resulting information is not material, and in some situations additional disclosures beyond the explicit requirements may be required to meet the wider disclosure objectives in standards or to provide a true and fair view. This can be the case particularly for transactions, other events or conditions that are not specifically addressed by standards, and in areas that involve significant judgement and estimation uncertainty.

Investors may expect more granular, entity‑specific and quantified information, including about assumptions, judgements and estimates in financial reporting as such details can help them assess the entity’s future cash flows and prospects. However, entities may take a different view as to the level of detail that is material and feasible to quantify. Boards apply their judgement in deciding what information is material, after considering primary users’ information needs and all relevant requirements and circumstances, including both quantitative and qualitative factors. There is no obligation on a board to report on information it does not consider material, nor in general to explain why it does not consider that information to be material.

2.9. How do materiality judgements apply to disclosures about climate-related and other uncertainties?

In the context of climate-related disclosures investors want to understand the effect of climate change on the financial statements, particularly if the entity has disclosed climate-related risks in the front half of the annual report or operates in a sector investors expect to be affected. An entity may have considered the issue but not identified any quantitatively material effects (e.g. asset impairments or provisions) for the current period financial statements. In such cases, investors may want to understand how the entity reached that conclusion, and the entity should also consider whether or not additional explanations or details are material on a qualitative basis.

To help entities disclose the effects of uncertainties such as climate change on the financial statements, the International Accounting Standards Board has issued illustrative examples on 'Disclosures about Uncertainties in the Financial Statements'. The examples illustrate the application of materiality judgements, including a scenario in which additional disclosures beyond explicit requirements in accounting standards are required, and another in which they are not.

2.10. How does the aggregation and disaggregation of information relate to materiality judgements?

Materiality judgements involve decisions about how much to aggregate and disaggregate information. Too much or too little aggregation can result in omitting or obscuring material information. Generally, only similar items of information should be aggregated. Aggregating items of information that are dissimilar can obscure material information. Sometimes items of individually immaterial information could become material when aggregated with similar items. For example, an entity might be exposed to supply chain disruption as a result of exposures to multiple different types of risks, which might not individually be material to disclose.

IFRS 18 'Presentation and Disclosure in Financial Statements' introduces additional guidance on the aggregation and disaggregation of information in the financial statements applying the principle of aggregating based on shared characteristics and disaggregating based on characteristics that are not shared. For example, an entity might disaggregate information about a class of property, plant and equipment if it identifies that a class contains items subject to dissimilar risk characteristics such as different exposures to climate‑related transition risks.

The approach to disaggregation might be different for the strategic report and the financial statements. Sometimes additional disaggregation may be necessary to explain amounts in the financial statements, including the factors affecting them. It may also be relevant to disaggregate some information in the strategic report on a different basis (such as by geographic location) even if the entity otherwise analyses its performance on another basis (such as by operating activities or product lines).

2.11. How does audit materiality differ from reporting materiality?

Separately from materiality assessments performed by entities, auditors also assess and apply materiality throughout the audit, including when planning and performing audit procedures, evaluating identified misstatements and forming the audit opinion. Materiality helps the auditor to focus on matters that could reasonably be expected to influence the decisions of users of the financial statements.

The auditor determines an overall materiality for the financial statements which guides the planning and performance of the audit. In doing so, the auditor considers the requirements of the reporting framework, the needs of users of the financial statements and entity-specific circumstances. The auditor typically selects an appropriate benchmark measure and applies a percentage, using professional judgement supported by the firm’s audit methodology. The auditor also establishes performance materiality which is set at a lower level and influences the nature, timing and extent of audit testing. The auditor reassesses both materiality and performance materiality as the audit progresses and also considers qualitative factors, including when evaluating matters and identified misstatements.

For some entities (such as public interest entities and those that apply the UK Corporate Governance Code) the auditor communicates aspects of its approach to materiality to those charged with governance. Audit reports that communicate key audit matters (such as those for listed entities) also specify the thresholds used for materiality and any significant judgements made by the auditor in determining materiality.

It is important for entities to understand how the auditor applies materiality and the key judgements involved. Directors and audit committees have a role in challenging materiality assessments as part of the review of the annual report and the effectiveness of the audit (when applicable).

Footnotes

1. [1]

   For example, IFRS Accounting Standards, Financial Reporting Standards applicable in the UK and Ireland (UK GAAP), the 'Guidance on the Strategic Report' and/or UK Sustainability Reporting Standards may be relevant to UK entities.

3. Process for applying materiality

Entities may wish to develop their own process for applying materiality when preparing annual reports. The following tips for an illustrative and iterative process may help entities with this.

1. Define the audience

• Who are the primary users of the entity’s annual report (i.e. current and future investors, lenders and other creditors)?
• What decisions do they make and what information do they need? Focus on common information needs.
• Refer to feedback and requests from stakeholders, and analyst reports.

2. Identify potentially material information

Refer to reporting frameworks, standards and guidance, but avoid taking a checklist approach and consider the entity’s circumstances.

• What are the most important events, transactions and factors affecting the annual report? Think holistically about financial and operational performance, sustainability and the external environment.
• Sources of information may include:
  • Board agenda and strategy
  • Board and management information packs and dashboards
  • Investor and capital markets communications
  • Risk registers and scenario analysis
  • Sustainability assessments
  • Stakeholder feedback, questions and requests
  • Industry, market or technological developments
  • Macro-economic trends and geopolitical environment
  • Reporting by peers with similar activities

In each case, consider the entity’s circumstances. Information may not be material just because it is requested by stakeholders or disclosed by peers. Don’t add irrelevant or immaterial disclosures 'just in case'.

3. Assess and determine material information

• Apply the definition of material information. Could the information influence primary users’ decision-making?
• Decide what information to include and exclude. For example, can more detailed information or information for other stakeholders be reported on the website or in other communications outside the annual report?
• Consider both quantitative and qualitative factors.
• Decide on the level of detail for disclosures. How much information do primary users need?

4. Organise disclosures for effective communication in the annual report

• Decide where to locate information in the different parts of the annual report. Give prominence to the most important matters. Minimise duplication and highlight linkages by using cross-referencing and signposting to avoid obscuring material information.
• Decide what information to present separately, to aggregate or to disaggregate in the primary financial statements, in the notes and in narrative reporting.
• 'Tell the story' to explain the performance, position, development and future prospects of the business. Strategic themes or pillars may help in organising material information and providing linkage.
• Apply the FRC communication principles to ensure the annual report communicates material information about the entity in the most effective way to primary users.
• Consider digital tagging of information in the annual report and how the annual report might be digitally consumed. Digital tagging can make information more accessible and can help highlight material information.

5. Review disclosures in the annual report as a whole

• Stand back and reassess materiality. Does the annual report as a whole include all material information and exclude immaterial information? Are there any individually immaterial items that, when considered in aggregate, could influence decisions of primary users?
• Review the annual report from cover to cover. Is it fair, balanced and understandable? Is it coherent and internally consistent with linkage of related information? Are the key messages consistent with other communications such as investor presentations?
• Plan time for review and challenge by specialists, senior management, the audit committee and the auditor. Allow sufficient time to assess whether any suggested additions are material for the entity.

6. Refresh materiality assessments annually

• Reassess materiality annually. Matters that are most important for the entity and material information about them change over time.
• Avoid simply rolling over last year's annual report and then adding to it. Remove content that is no longer relevant or material. For example, are there any accounting policies that are no longer relevant or that could be condensed?
• Consider redrafting some sections or the whole report periodically to tell a story focused on the latest strategic themes and key issues.

4. Further information

The following materials and references may be helpful for UK entities in applying materiality when preparing annual reports.

Source	Organisation and year published
Materiality in practice: applying a materiality mindset	FRC, 2023
Guidance on the Strategic Report	FRC, latest edition 2026
What Makes a Good Annual Report and Accounts	FRC, 2022
IFRS Practice Statement 2: Making Materiality Judgements	IASB, last amended 2021
Sustainability-related risks and opportunities and the disclosure of material information	IFRS Foundation educational material, 2024

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Published: 29 July 2026