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Saturday, January 2, 2010

The Materiality Concept

Only items material in amount or in their nature will affect the true and fair view given by a set of accounts.

An error which is too trivial to affect anyone’s understanding of the accounts is referred to as immaterial. In preparing accounts it is important to assess what is material and what is not, so that time and money are not wasted in the pursuit of excessive details.

Determining whether or not an item is material is a very subjective exercise. There is no absolute measure of materiality. It is common to apply a convenient rule of thumb.

For example to define material items as those with a value greater than 5% of the net profit disclosed by the accounts.

However some items disclosed in accounts are regarded as particular sensitive and even a very small misstatement of such an item would be regarded as material.

An example in the accounts of a limited company might be the amount of remuneration paid to directors of the company.

The assessment of an item as material or immaterial may affect its treatment in the accounts.
For example, the profit and loss account of a business will show the expenses incurred by the business grouped under suitable captions; but in the case of very small expenses it may be appropriate to lump them together under a caption such as “sundry expenses” because a more detailed breakdown would be inappropriate for such immaterial amounts.

In assessing whether or not an item is material, it is not only the amount of the item which needs to be considered. The context is also important.


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