BIM31045 - Tax and accountancy: materiality: an accountancy concept

Materiality is an accounting concept. The interpretation of materiality in financial reporting is given in TECH 32/96, a statement issued by the ICAEW Council, and in the Accounting Standards Board’s 'Statement of principles for financial accounting' (3.28 - 3.32).

Materiality is the judgement made by the preparers of accounts about whether an item should be reflected in those accounts to give a true and fair view. The objective of financial statements is considered to be the provision of financial information that is useful to a wide range of users for assessing the management’s stewardship and for making economic decisions. Materiality involves a judgement of what information should be given in a set of financial statements. It is a threshold quality that is demanded of all information that is given in the statements so that the information provided is relevant and important and is not swamped by unnecessary detail.

An item would be material to the statements if its misstatement or omission might reasonably be expected to influence the economic decisions of the users of the statements. Whenever immaterial information is given in the statements, the result might be to impair the Understandability of the other information provided. In these circumstances the immaterial information should be excluded.

Auditors when describing the thresholds within which they perform audit work and their audit report also use the word ‘materiality’. This should not be confused with the judgements made by those who are responsible for preparing the accounts to ensure that they show a true and fair view - the Directors of companies and proprietors of trades, professions and businesses.