Intermediate Accounting (16th Edition)

Published by Wiley
ISBN 10: 1118743202
ISBN 13: 978-1-11874-320-1

Chapter 2 - Conceptual Framework for Financial Reporting - Review and Practice - Questions - Page 62: 5


Ideally, the concept of materiality in financial accounting refers to the relative significance of an amount, item or activity towards informative disclosure, proper presentation of financial position as well the results of operations. Materiality has qualitative and quantitative aspects and which both the nature of the item as well its relative size enter into its evaluation. Its important to note that an accounting misstatement is said to be material if the knowledge of the misstatement will affect the decisions of the average informed user of the financial statement. Financial statements tend to be misleading when they omit a material fact or even when they include so many material matters as to be confusing. The most relevant criteria of assessing materiality usually depends on the circumstances as well the nature of the item and varies greatly among companies. The effect upon net income or rather earnings per share is the most commonly used measure of materiality. It normally reflects on the prime importance attached to the net income by capital providers among other users of the financial statements.

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Additionally, there are no rigid standards or rather guidelines for assessing materiality. The lower bound of materiality has been estimated at 5% of the net income however the determination usually varies based upon individual case and many are the times that it might fall within these limits.
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