Question

The primary area of income statement creativity is the opportunistic classification of revenue, gains, expenses, and losses. Although materiality is defined subjectively, one rule of thumb suggests that the misstatement or omission of an item that falls under a 5% of revenue threshold is not material in the absence of particularly egregious circumstances. Equally important is the appropriate classification of amounts within the statement of comprehensive income and the statement of financial position. The financial statement users have placed greater importance on relevance of individual accounts balances and the overall picture presented by the financial statements. Required

a) Explain the term materiality and state the circumstances in which a small item (low value) can be termed to being material

b) State the items that can be classified as other comprehensive income (OCI) under the International Financial Reporting Standards framework

c) Discuss whether the absolute usefulness of the financial statements is achievable

Answer 1

a)

Materiality refers to the relative importance of an item or an event. An item should be regarded as material if there is a reason to believe that the knowledge of that item can change or influence the decision of the investor. Also the item is material or not will depend on the nature or the amount of the item.

An item can be material for one enterprise may not be material for other enterprise. For example, amount spent on the purchase of an item of $4,000 is material for an enterprise having turnover of $2,500 but not material for an enterprise having turnover of $1 million.

Hence, it is seen that all item material to record which are able to change the decision of an informed investor.