Tax and accountancy: materiality: an accountancy concept
Materiality is an accounting concept. Guidance on materiality in financial reporting is given in TECH 03/08, issued by the ICAEW. The concept is also considered in Section 2 of FRS102, in the ASB’s statement of principles for financial reporting and in the IASB’s conceptual framework for financial reporting.
The objective of financial statements is to provide financial information about the financial position, performance and cash flows of an entity that is useful for economic decision-making to a wide range of users and to show the results of management’s stewardship. Materiality is a qualitative characteristic that must be considered in determining what information should be given in a set of financial statements. It is a threshold quality that is demanded of all information given to ensure it is relevant and is not swamped by unnecessary detail.
Information is material, and therefore relevant to the decision-making needs of users, if its misstatement or omission could influence the economic decisions of those users. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The determining factor could be the size, the nature or a combination of both. Whilst in general terms accounting standards do not apply to immaterial items, it is inappropriate to make or leave uncorrected immaterial departures from GAAP to achieve a particular presentation of an entity’s financial position, performance or cash flows.
Auditors when describing the thresholds within which they perform audit work and their audit report also use the word ‘materiality’. This should not be confused with the judgments made by those who are responsible for preparing the accounts to ensure that they show a true and fair view - the Directors of companies and proprietors of trades, professions and businesses.