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. |