Materiality Principle or materiality concept is the accounting principle that concern about the relevance of information, and the size and nature of transactions that report in the financial statements.
The main objective of the materiality principle is to provide guidance for the accountant to prepare the entity’s financial statements.
And the most important thing is to make sure that information using by shareholders and investors is sufficient enough for them in making the correct decision.
The information, size, and nature of transactions are considered material if the omission or error of it could potentially lead to the decision of users of financial information.
The materiality concept is not only used by the accountant as the basis to prepare the entity’s financial statements but also used by auditors to assess the correctness of financial statements’ disclosure and use in their audit testing.
Normally, the auditor determines what is the performance materiality and what is the tolerable error for their testing.
There are some differences from one accounting standard to another accounting standard. For example, in IFRS, information is material if the omission could lead to misleading in decision making.
And the filter of materiality hand to management for decision making. IFRS is a kind of principle base accounting standard. Therefore, many shareholders and investors find it difficult in dealing with materiality.
In US GAAP, for example, items should be separately disclosed in the financial statements if they have value over 5% of total assets. This is also the same the security and exchange in the US and it is used to apply to the items in the balance sheet.
But, for items in income statements, items that could affect the net income from positive to negative are also considered as material items even they are small.
Basically, materiality applies in US GAAP sound easy and helpful for shareholders and investors that IFRS. Because in US GAAP if the transaction meets the requirement, then the accountant must be complying with it.
But in IFRS, the accountant still could disclose the transactions with others even the value is high enough to disclose alone. If they could interpret that it will not misleading.
In general, in the materiality principle, the size, information, and nature of the transaction are considering as materiality is different from one entity to another entity. The difference is mainly because of the size of the entity.
The materiality Principle is not only protected the shareholder’s and investors’ interest but also help to account for preparing its Financial Statements.
Base on this principle, the account could know what is material and what is immaterial. They also know what should be separately disclosed and what should be included with other transactions.
In case you want to discover more about the accounting principle, this book is recommended for you: Accounting Principles
This book is punished by three co-authors and by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso (Author) and written review by 176 customers.
Written by Sinra