Characteristics of materiality

Characteristics of materiality

Characteristics of materiality can be defined in terms of economic decision making of user, nature & size of financial item, materiality level.

The Materiality is an important principle used in the preparation of financial statements and according to International reporting standards all material items are required to be disclosed in the financial statements.

Important characteristics of Materiality

Some important characteristics of materiality have been explained below;

1.   Definition of material item

An item is said to be material, if its omission or misstatement in the financial statements could influence the economic decision of the users made on the bases of financial statements.

2.   Disclosure of Material item

Materiality is an important principle, and according to international accounting standards, all material items needs to be disclosed separately in financial statement.

3.   Nature & Size of Financial item.

Materiality mainly depends on two factors i.e. size & nature of the financial item. Most of the time both of these factors collectively defined or determined the materiality of a financial item. However, in rare circumstance one factor may individually define the materiality of an item.

4.   Materiality level

Materiality level is a relative calculation and cannot be defined in absolute terms. It varies company to company and industry to industry. Materiality level is defined by the management of the company.

Different companies use different bases for materiality level determination. Some companies use sales figure and other company use total asset. Some important bases for defining material are

1.    Sales.

2.    Total expense.

3.    Total Assets.

It is important to note that a company may use more than one base for defining the materiality of an item. A company may say that an item, which value is equal or more than 5% of total sales shall be regarded as material item.

5.   List of characteristics of materiality

Some important characteristics of materiality are listed below;

a.    Material item omission effects the decision making.

b.    Materiality depends on nature and size of financial items.

c.    Materiality cannot be defined in absolute terms.

d.   Each material item should be separately disclosed in FS.