What is Materiality Concept?

Introduction

When preparing financial statements; especially on the disclosure notes, we shall think of materiality. How should we disclose each item in the financial statements? Shall we put at lump sum amount or at separate notes? All of these questions would best describe about the materiality concept. So what is materiality concept?

Definition

The materiality concept refers the way how we treat and disclose transactions or events in the financial statements. If those transactions or events are material to the financial statements, those items shall be presented separately under other line items or we need to have separate disclosure notes.

Practically, any omission or misstatements of material items could potentially impact the financial statements. Thus ultimately impact the decision of the users of financial statements that result in incorrect decision making.

The materiality from one company to another depends on the threshold for each company and this threshold also depends on the level of total turnover, total assets or total liabilities for each type or nature of transactions or events.

Thus, as an accountant or auditor, it is important to keep this in mind. Any immaterial items shall be disregard and focus on the material items instead. All those immaterial items in practice are grouped in certain categories depends on its nature.

Normally, any immaterial items can possibly allow each company to ignore certain selected standards while they can focus on the material items. In this way, each company could potentially improve its efficiency of accounting operation.

However, for material items which could potentially impact on stakeholders’ decision making shall be grouped or disclosed separately. Any material transactions or events can potentially make a difference in understanding of an entity’s financial condition or financial affairs.

READ:  Accounting for Consideration Received from Vendors – ASC 705-20

Therefore, how each accountant or auditor decide on the materiality depends on their professional judgment and their practical experience.

Conclusion

While immaterial items whether individually or jointly could not potentially impact on the financial statement, each accountant or auditor should focus on the material items instead. Thus, there should be correct procedure in deciding the materiality and disclose separately where applicable.

Scroll to Top