1 - INTRODUCTION
For the purpose of this paper, I selected Benetton Group S.p.A. (the company), an Italian company that manufactures and markets fashion apparel in wool, cotton and woven fabrics as well as leisurewear. The company prepares its consolidated financial statements (FS) according with the International Financial Reporting Standards (IFRS) adopted by the European Union. Since 1989 the company has been listed in the New York Stock Exchange (NYSE) and required to comply with the Security Exchange Commission (SEC) Act of 1933 and 1934. As the non-US issuer, the company was obligated to provide a full reconciliation of its annual reports from the IFRS to the Generally Accepted in the United Stated Accounting Principles (US GAAP). The filing had been completed with the SEC on a Form 20-F. But in 2007, the SEC released all non-US issuers from the Form 20-F filing obligation (SEC, 2007). As the consequence, the company’s last reconciliation was provided on the Form 20-F for 2006 annual filing. After 2007, the company has not referred to US GAAP reconciliation in its annual financial reports.
The reconciliation from the IFRS to the US GAAP shows that accounting for the same line item under two standards can create financial statement differences. Those differences have material impact on the measurement of the net income under both standards. But to decide if differences are significant or material, first one should understand the concept of materiality. Next, one should find a reconciling adjustment with a martial effect on net income. Then, one should analyze what has led to the creation of the adjustment, and to calculate the amount that affects the net income (Street et al., 2000).
2 - CONCEPT OF MATERIALITY
Materiality is an important concept for any decision making and for properly analyzing financial statements. The concept has been discussed over the years on the worldwide arena. The International Standards on Auditing (IAS) as well as the Financial Accounting Standards Board (FASB) refer to the materiality as the magnitude of an omission or misstatement of financial information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been influenced or decision affected.
After analyzing definitions on materiality under various standards, it seems as if none of the standards provide specific materiality guidelines. They only stress the importance of accountants’ judgment as the core of decision making. To set the right materiality threshold, the professionals should consider many variables, such as relative size of the item to its assigned bottom amount, the item’s effect on the net income and the size of the entity.
Generally, the Big Four’s auditing policies indicate that for an item to be material, an auditor should consider a gross or net unrecorded difference of pretax income to exceed five percent. The five percent materiality...