Materiality principle

Materiality principle
See also
Accounting concepts Accounting Convention Accounting policies Prior period adjustments Conservatism principle Exceptional Item Accounting process Opening stock Accounting estimate

Materiality Principle is a principle used mostly in accounting to define the relevance of information and features of transactions, which are recorded as per financial statements.It also states that company can invade another rule used in accounting if the amount as per transaction is not big enough to cause an error in financial statement.

Usability

Main use of applying Materiality Principle is easing financial statements preparation by guiding an accountant. This leads to providing Investors and Shareholders with information needed to make a decision and ascertain that the information we deliver is comprehensive.

The idea of Materiality Principle is that if transaction or the amount are immaterial across the business, it should not be considered the same as material transaction and amount.

Aim of the principle is not only to protect the investors and shareholders interest, but it is facilitation for accountants while preparing Financial Statements. Except knowing what is material and what is not, elements that should be separately disclosed and those included in other transactions are indicated.

Conception

If dropping or error of information can cause making a different or new decision, then the size and details of transaction are considered as Material. Accountants are obliged to follow rules accepted in accounting unless it makes no difference if a specific rule is not followed and when proceeding as per the principle would be overly hard or expensive.

If the Materiality Principle is followed and other accounting rule is skipped, there will be no prominent change in net income of the company and financial statements should stay intact. Additionally, by following the principle by our accountants, auditors can easily measure propriety of financial statements.

Immateriality and Materiality

Immaterial case would be an expensive piece of furniture, its useful life is 5 years and it has been bought for the office. Different accounting principles would treat the purchase in various ways.

• As per Matching Principle, the cost would be recorded as an asset and amortised over the 5 years,
• As per Materiality Principle, the cost of furniture can be reported as lump-sum in a year-end financial statement, without amortising the purchase.

In that case we can follow the Materiality Principle as shareholders, investors and creditors will not be misinformed.

Materiality depends on the size of business, workstream, stocks and much more. It does not only involve monetary value of a purchase or features of the object of transaction, but also many different factors must be taken into account.

References

• Chewning G., Pany K., Wheeler S., (1989). Auditor Reporting Decisions Involving Accounting Principle Changes: Some Evidence on Materiality Thresholds, "Journal of Accounting Research". v. 27, no. 1, 78-96.
• Eccles R., Krzus M., Rogers J., Serafeim G., (2012). The Need for Sector‐Specific Materiality and Sustainability Reporting Standards, "Journal of Applied Corporate Finance". v. 24, i. 2, 65-71.
• Hsu C., Lee W., Chao W., (2013). Materiality analysis model in sustainability reporting: a case study at Lite-On Technology Corporation, "Journal of Cleaner Production". V. 57, 142-151.
• Mio C., Fasan M., (2014). The determinants of materiality disclosure in integrated corporate reporting, "Università Ca' Foscari Venezia, Departament of Management". 8-17.

Author: Anna Zalewska