MATERIALITY CONCEPT

• Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements

• Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor

ILLUSTRATION NO.1

Company A bought 6 months supplies of stationery costing $600.

Question: Should the company spread the cost of this stationery for 6 months by expensing off $100 per month to the Income Statement ?

Answer : Based on this concept, as the amount is so small or immaterial, it can be expensed off in the current month instead of tediously expensing them for the next 6 months

ILLUSTRATION NO.2

Company A purchases a $200 hand phone and expenses it immediately instead of recording it as an asset and depreciating it over its useful life.

Question: Is this practice acceptable?

Answer: This practice is acceptable of the materiality concept as the value of item purchased is to small to justified booking it in as fixed asset.

ILLUSTRATION NO.3

Company A is a very large corporation. The company prepares the financial statement by rounding down to the nearest thousand.

Question: Is this permissible?

Answer: Based on the materiality concept, this is permissible.