01-09-2010, 03:36 PM
I can try and explain materiality in simple terms. One of the primary users of the financial statements are the shareholders. "Information" in the financial statements can be anything, disclosures, line items in the Statement of financial position and so on.
What is meant by materiality is, keeping the overall position of the entity in context, information may be worth mentioning or not. For example, let's assume there are two entities, "A" which is a multinational which has transactions of Rs. 10,000,000 in a year and "B" which has transactions of say Rs.20,000 in a year.
Both these entities prepare financial statements. Now let's assume both of these entities buy stationery worth Rs.500. Considering the overall position of "A" Rs.500 spent on stationery might not be 'material', that is, its reporting would no doubt increase accuracy of the financial reporting BUT would not be worth the extra time and cost associated with going through the trouble of reporting a small transaction of worth Rs.500.
However, for entity "B" which has transactions totaling Rs.20,000 in a month, Rs.500 is material since the Rs.500 makes up (500/20,000)*100 = 2.5 % of its yearly transactions. If you omit or misstate this amount, it will overstate or understate your profit - since expenses reduce the profit.
For "A" the Rs. 500 transaction is (500/10,000,000)* 100 = 0.005 % percent of its monthly transactions. So for that entity, this information is probably immaterial.
Materiality for different entities is different, depending on what they think is important enough to be reported or irrelevant enough to not be reported without misstating the financial statements.
What is meant by materiality is, keeping the overall position of the entity in context, information may be worth mentioning or not. For example, let's assume there are two entities, "A" which is a multinational which has transactions of Rs. 10,000,000 in a year and "B" which has transactions of say Rs.20,000 in a year.
Both these entities prepare financial statements. Now let's assume both of these entities buy stationery worth Rs.500. Considering the overall position of "A" Rs.500 spent on stationery might not be 'material', that is, its reporting would no doubt increase accuracy of the financial reporting BUT would not be worth the extra time and cost associated with going through the trouble of reporting a small transaction of worth Rs.500.
However, for entity "B" which has transactions totaling Rs.20,000 in a month, Rs.500 is material since the Rs.500 makes up (500/20,000)*100 = 2.5 % of its yearly transactions. If you omit or misstate this amount, it will overstate or understate your profit - since expenses reduce the profit.
For "A" the Rs. 500 transaction is (500/10,000,000)* 100 = 0.005 % percent of its monthly transactions. So for that entity, this information is probably immaterial.
Materiality for different entities is different, depending on what they think is important enough to be reported or irrelevant enough to not be reported without misstating the financial statements.