Materiality judgments are concerned with screens or thresholds. Is an item, an error, or an omission large enough, considering its nature and the attendant circumstances, to pass over the threshold that separates material from immaterial items?
The more important a judgment item is, the finer the screen should be that will be used to determine whether it is material.
The relative rather than the absolute size of a judgment item determines whether it should be considered material in a given situation.
Some hold the view that a set of
quantitative materiality guides or criteria should be developed
so that preparers of financial statements could look to these
guides for authoritative support. The current position, however,
is that materiality judgments can properly be made only by those
who have all of the facts. No general standards of materiality
could be formulated to take into account all of the
considerations that enter into an experienced human
judgment. However, on occasion, quantitative guidance on
materiality has been written into standards promulgated by
accounting rule-makers.
see: FASB Concepts Statement No. 2, Qualitative
Characteristics of Accounting Information
|
FASB Concepts Statement No.
8, Paragraph QC11:
Information is
material if omitting it or misstating it could influence
decisions that users make on the basis of the financial
information of a specific reporting entity. In other
words, materiality is an entity-specific aspect of
relevance based on the nature or magnitude or both of the
items to which the information relates in the context of
an individual entity’s financial report. Consequently, the
Board cannot specify a uniform quantitative threshold for
materiality or predetermine what could be material in a
particular situation. |
SEC's
Staff
Accounting Bulletin No. 99 (SAB No. 99) discusses the SEC's
concern over certain materiality issues.
| From
the International Accounting Standards Board (IASB), Preliminary
Views on an improved Conceptual Framework for
Financial Reporting—The Objective of Financial
Reporting and Qualitative Characteristics of Decision-useful Financial
Reporting Materiality Information is material if its omission or misstatement could influence the resource allocation decisions that users make on the basis of an entity’s financial report. Materiality depends on the nature and amount of the item judged in the particular circumstances of its omission or misstatement. A financial report should include all information that is material in relation to a particular entity—information that is not material may, and probably should, be omitted. To clutter a financial report with immaterial information risks obscuring more important information, thus making the report less decision-useful. |
| From the
AICPA's The Financial Reporting
Framework for Small- and Medium-Sized
Entities: Materiality 1.09 Users are interested in information that may affect their decision making. Materiality is the term used to describe the significance of financial statement information to users. An item of information, or an aggregate of items, is material if it is probable that its omission or misstatement would influence or change a decision. Materiality is a matter of professional judgment in the particular circumstances. Materiality is considered when applying the principles in the FRF for SMEs accounting framework and meeting the objectives of financial statements. Items that are immaterial to the financial statements are not required to be separately presented or disclosed. |