Question

How is materiality related to the proper presentation of financial statements? What factors and measures should be considered in assessing the materiality of a misstatement in the presentation of a financial statement?

Answer 1

Materiality: Company specific aspect of relevance.

Immaterial: no impact on a decision-maker. Companies and auditors adopt the rule of thumb that anything under 5% of net income is considered immaterial.

• Info is material is omitting it or misstating it could influence decisions that users make on the basis of the reported financial info.
• Assessing materiality is challenging because it requires evaluating both the relative size and importance of an item.
• Companies must consider both quantitative and qualitative factors in determining whether an item is material. - Thus it is generally not feasible to specify uniform quantitative thresholds at which an item becomes material. Rather, materiality judgments should be made in the context of the nature and the amount of an item.