Materiality Concept

Introduction

It is one of the important accounting principles and is the basis of many accounting requirements set out in either of generally accepted accounting principles or alternatively International financial reporting standards. The primitive feature in relation to the materiality concept is that there should be no omission or alternatively misstatement of any piece of information which can potentially impact the decision making of the stakeholders of the organization.

Material information can be financial information or alternatively non-financial information. You would be thinking why non-financial information is material. The rationale is that the nature of the information is such that it can potentially impact the decision making of the stakeholders. Let’s observe some of the instances where information is material on the basis of either nature or alternatively the financial impact.

Examples of Material Information

The presence of the Related parties of the organization. Notwithstanding to the fact, that there is no transaction with related parties, it is important that such relationships are reported in the notes to the financial statements as per the material concept. This disclosure is required because the information is material due to its nature. Lawsuits in which the organization is a party is another example of material information that needs to be reported in the notes to the financial statements due to its nature. The company total of the penalties owing to the non-compliance of the laws amounts to 25% of the net income. This is the material amount in terms of size and needs to be reported in the notes to the financial statements because of its financial impact.

Concept of Materiality and Auditors

Auditors are quite serious about the concept of materiality. In fact, they have consented upon a performance materiality level that depends upon their judgment and it assists in the execution of the audit of the organization. Any financial information that is beyond the size of the financial information is subjected to the audit procedures and verified if it is really for the purpose of the business of the organization. This yields reasonable assurance to the auditors and they can opine that the organization is fair in its financial reporting practices. The amounts which are less than the materiality threshold are not subjected to detailed audit procedures. In this way, auditors have reasonable assurance instead of the absolute assurance. The absolute assurance is possible only when the auditors check each and every transaction of the organization which obviously not possible due to the time and cost restraints.

It is difficult to quantify the materiality and at times it has to lead the organization into recording the tiny transactions which significantly increased the costs of the accounting. Materiality principle depends upon the judgment of the management and it is up to management to decide what information should be made part of the financial statements.

Conclusion

In the nutshell, The primitive feature in relation to the materiality concept is that there should be no omission or alternatively misstatement of any piece of information which can potentially impact the decision making of the stakeholders of the organization. Material information can be financial information or alternatively non-financial information. The rationale is that the nature of the information is such that it can potentially impact the decision making of the stakeholders.