Question

Chapter 1 Question E1-8. Isn't the answer for 8 (A company should disclose information only if the perceived benefits of the disclosure exceed the costs of providing information. Which constraint does this statement describe?) cost effectiveness and NOT materiality? I'm asking about a question in my Intermediate Accounting book.What more do you need????

Answer 1

The materiality is concept to simply state that all material transaction which can influence a stakeholder's outlook about a comapny are properly disclosed.

For e.g

suppose you buy a calculator for a bsuiness for $30 , you do not book it is an asset but book it in printing and stationery expenses

small expenses such as inventory inspection costs , postage stamps are not disclosed separately

i.e. they are immaterial

But changes n accounting policies / sale of assets/subsidiaries/investments are material transactions for a company henc are disclosed

Niw lets look at cost effectiveness constraint:

In the world of cut throat competition everyone wants to be one step ahead of its competitors.

Suppliers want to know the finanacial health of the company so that they know the company is healthy enough to pay them timely

So what information goes into the public domain is the cost company pays to receive the benefits ( not only monetary) from all it stakehoder's .

However it is very diffcult to put a value to accounting informationa and weigh its cost and benefits.

So the definition:

Cost effectiveness constraint:A company should disclose information only if the perceived benefits of the disclosure exceed the costs of providing information

Cost effectiveness and materiality so go hand in hand.

But practically it is a difficult aspect to put into place