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The Best Accounting Concepts Materiality

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					The Best Accounting Concepts Materiality
Accuracy, relevance and reliability are critical characteristics of good accounting information.
The concept of materiality helps to reinforce those characteristics by classifying financial
information’s usefulness to its users.
As such, materiality is a subjective concept. Whether financial data is material or not depends
not just on its users but on its purpose.
Material information defined as anything that influences the economic decisions of financial
report users. In other words, materiality equates to importance or significance and pertains to
financial data, transactions and even errors.
For example, if the value of an asset is $1,000.00, but it is entered in the books as $1000.09, that
is an immaterial error, since it's not significant enough to affect the decisions of those who are
reading the information. The true test of whether information is material or immaterial is the
answer to a basic question: “Would the omission or inaccurate reporting of this information
affect its users?”
Given the wide range of external information users, accountants should have an idea on how
precise information needs to be. Some external users of financial reports include government,
regulators, lenders, suppliers and the public. Therefore, accountants need to consider just how
accurate information needs to be. It may not be necessary to have information accurate to the
nearest cent or dollar.
Unfortunately, establishing materiality is far from an exact science. Preparers of financial
statements typically use rules-of-thumb or guidelines to determine what to include or omit and
how precise included information needs to be. After all, minor errors can be major depending on
the context. The principles of prudence and fair representation can be affected by the
materiality concept.
Recall that financial reports are summarized data. Therefore, materiality may require the
aggregation of data. For example various overheads associated with a cost centre may be
summarized. Within those overheads, there may be a subheading for “sundry expenses” as well.
As such, the concept of materiality affects how accounts are prepared.
Context is also important to materiality as is financial accuracy. For instance, errors of omission
are material, even though they may cancel each other out. Although the error might not affect the
balancing of ledger accounts or the Statement of Financial Position, it may not properly reflect
the transactions and events that occurred.
The concept of materiality gives a guideline for information accuracy. It also reinforces other
accounting concepts, such as fair presentation, and characteristics of financial statements – like
accuracy. Materiality ensures that information is sufficiently precise without including
unnecessary detail.

				
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