Question

In: Accounting

Using your own examples, explain materiality, using the correct accounting standard and citing the right paragraphs.

Using your own examples, explain materiality, using the correct accounting standard and citing the right paragraphs.

Solutions

Expert Solution

For accounting purposes, materiality refers the size of the amount of a given transaction that has the potential to influence the decisions of the user's of financial statement. In other words that financial information which would end up making wrong decisions by the user's decision making, if omitted or misstated.
Examples could be,
Accounting principles requires business to spread cost of asset over its life. However though the life of cases and covers span for at least more than a year, we recognise the entire amount as expenses in the year of purchase as their amounts at petty and hence charged to revenue immediately.

Another example could be small insignificant written down value software assets are charged as depreciation instead of appearing as single digit amounts in financial statements.

In IAS Para 1.7 "Materiality and aggregation", an information is material if it's omission, lack of clarity or misstatement could adversely impact the decision of the users of those financial statement. Hence any information which has no potential of influencing the user's decision making adversely, they are immaterial.

Paragraph 8 or the IFRS practise statement 2: Materiality judgements tells that the disclosure requirements are not applicable if the impact of translation is immaterial.


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