| One of the characteristics of good accounting | | | | Materiality might result in aggregation of |
| information is that it should be sufficiently | | | | accounting information. Let us assume that a |
| accurate, relevant and reliable. Materiality seeks to | | | | business has ledger accounts for different |
| ensure that accuracy is established by designating | | | | overheads. When entering the data in the |
| financial data as material or immaterial based on | | | | statement of income, the headings from the |
| the users of financial reports. Therefore, | | | | different accounts may be aggregated as sundry |
| materiality refers to accounting information and its | | | | expenses. Therefore, materiality affects the |
| users; it is also inherently subjective. | | | | treatment of accounts as well. |
| The subjectivity of the materiality concept is | | | | It is important to note that materiality is not only |
| noted in ACCA's Study Text for Financial | | | | based on financial accuracy but contextual |
| Accounting (BPP Publishing, c 2009). According to | | | | accuracy also. For instance, if a misstatement of |
| that source, "Information is material if its omission | | | | information is based on a valuation method, that |
| or misstatement could influence the economic | | | | could be considered immaterial, since alternative |
| decisions of users taken on the basis of the | | | | methods may have produced different results |
| financial statements." By that definition, immaterial | | | | anyway. |
| information does not matter to those who make | | | | In addition, you can correctly present financial |
| economic decisions based on the accounts. | | | | information but misstate or omit vital information |
| Materiality is premised on the need for accurate | | | | for economic decisions. For example, consider the |
| and reliable financial data and on who the relevant | | | | omission of a bank loan in stating a figure. A bank |
| users of information are. Those who make | | | | loan is a liability but the principal from the loan is |
| economic decisions on an enterprise's financial | | | | an asset. Omitting this data might not affect the |
| accounts include managers, government agencies, | | | | figures substantially, but it would not properly |
| suppliers and investors. In preparing financial | | | | present the financial position of the enterprise. |
| accounts, accountants must ensure that they are | | | | You would notice that financial accounts generally |
| aware of how accurate information needs to be. | | | | round off figures. This is based on the materiality |
| Accountants generally have no clear guidelines on | | | | concept, since financial information need not |
| materiality. Usually, rules of thumb or conventions | | | | always have pedantic detail. |
| are applied in determining it. However, minor | | | | Materiality ensures that accounting information is |
| errors with sensitive financial information may be | | | | accurate and reliable while reinforcing other |
| material. In some cases, materiality has bearing on | | | | concepts like prudence and fair presentation. Since |
| the prudence concept and fair representation, | | | | financial accounts are highly summarized, |
| which are fundamental assumptions of financial | | | | materiality facilitates aggregation of information |
| accounts. | | | | without including irrelevant detail. |