Discuss Concept of Materiality?

> MATERIALITY --Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. --Materiality therefore relates to the significance of transactions, balances and errors contained in the financial statements. Materiality defines the threshold or cutoff point after which financial information becomes relevant to the decision making needs of the users. --Information contained in the financial statements must therefore be complete in all material respects in order for them to present a true and fair view of the affairs of the entity. --Materiality is relative to the size and particular circumstances of individual companies. --From a negative view point, materiality is critical because otherwise a great deal of time might be spent on trivial matters in the accounting process. Individual judgments are required to assess materiality, or to decide what the appropriate minimum quantitative criteria are to be set for given situations. What is material to one organization, may not be material for another organization

**CONCEPT OF MATERIALITY** The materiality concept is the principle in accounting that trivial matters are to be disregarded, and all important matters are to be disclosed. Items that are large enough to matter are material items. Materiality refers especially to: • The level of detail appropriate for different financial reports. • The importance of errors such as: – Reporting expenses, revenues, liabilities, equities, or assets in inappropriate accounts, or reporting them for incorrect reporting periods. – Omitting or failing to report important financial data. The materiality concept is an established, recognized accounting convention. Another such convention is the historical cost convention, by which transactions are recorded at the price prevailing when the transaction is made, and assets are valued at original cost. Comparing the two conventions, however, historical costs are usually ascertained and agreed rather objectively, with little uncertainty, whereas applying the materiality concept may call for more subjective judgment. Moreover, the subjective judgments of senior management, accountants, auditors, boards of directors, stockholders, and potential business partners, can differ, especially when competing interests are involved.

Hie Roshni, **Concept of Materiality can be discussed as follows :-** - The materiality concept, also called the materiality constraint, states that financial information is material to the financial statements if it would change the opinion or view of a reasonable person. In other words, all important financial information that would sway the opinion of a financial statement user should be included in the financial statements. - The concept of materiality is relative in size and importance. Some financial information might be material to one company but might be immaterial to another. This is somewhat obvious when you think about a small company verses a large company. A large and material expense to a small company might be small an immaterial to a large company because of their size and revenue. The main question that the materiality concept addresses is does the financial information make a difference to financial statement users. If not, the company doesn't have to worry about including it in their financial statements because it is immaterial. - Most of the time financial information materiality is judged on qualitative and quantitative characteristics. Professionals are often left up to their experience and good judgment to understand what is material and what isn't.

Dear Roshni Para 17 of AS 1 ‘Disclosure of Accounting Policies’, states that financial statements should disclose all material items, i.e., items the knowledge of which might influence the decisions of the user of the financial statements. Materiality depends on the size of item or error judged in the particular circumstances of its omission or misstatement. From a positive perspective, materiality has to do with the significance of an item or event to warrant attention in the accounting process. From a negative view point, materiality is critical because otherwise a great deal of time might be spent on trivial matters in the accounting process. Individual judgments are required to assess materiality, or to decide what the appropriate minimum quantitative criteria are to be set for given situations. What is material to one organization, may not be material for another organization The relevance of information is affected by its materiality. Information is material if its misstatements (i.e., omission or erroneous statement) could influence the economic decisions of users taken on the basis of the financial information. Materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which the information must have if it is to be useful.

An accounting principle that states that financial reports only need to include information that will be significant (material) to their users. For example, an audit report would not need to specify the number of paper clips used by a bank. For a large corporation, an expenditure of a few thousand dollars would not be material, but for a smaller company it might be.