Question

How is materiality (or immateriality) related to the proper presentation of financial statements? What factors and measures should be considered in assessing the materiality of a misstatement in the presentation of a financial statement?

Short answer

All the material items must be disclosed as per the financial reporting framework and guidelines provided by the accounting standard board.

Based on the significance of a specific item, situation, period, size of misstatement, nature of misstatement, etc., on the financial statement, the item is treated as material or immaterial, and material items are disclosed. All materials items must be disclosed by way of note of amount or fact since any changes will affect the decision and business of the users of financial statements.

Step-by-step solution

Materiality as an Accounting Policy & Proper presentation of financial statements

Accounting policies are certain principles and methods followed for the presentation of financial statements. One important policy is materiality.

Materiality related to the proper presentation of financial statements by

• Disclosing all material items
• Usefulness to all stakeholders
• Avoiding misstatement and misunderstanding
• Following accounting policy, Accounting Standards, IFRS, Audit Standards, financial reporting frameworks, etc
• Presenting the statement as per the financial reporting framework.

Concept of Materiality & Disclosure Limit

Materiality concept means the financial statements must show a fair view and disclose all the items that may influence the decision of users of financial statements.

Certain limits are provided in case of materiality disclosure, such as disclosing income & expenditure based on 1percent of revenue from operations or 1,00,000, whichever is higher, disclosing the number of shares held by each shareholder when shares are more than 5 percent.

General Disclosure of Material Items & Related facts

The following must be disclosed since it’s a material item such:

• All significant changes or items that have an effect on financial statements and users of financial statements must be disclosed
• Any change in accounting policy in the preparation and presentation of financial statements also must be disclosed.
• When an item is found to be material, and the amount is ascertained, then disclose the amount. If the amount is not ascertained, then disclose the fact.
• If the specific item is not material now but would be material in a later period, then disclose the fact of such changes in a later period.

Factors considering Materiality of misstatement

Factors and measures that may be considered in assessing the materiality of a misstatement in the presentation of a financial statement:

• Misstatement, including any omissions or errors, is considered material if it affects the decision taken by users of financial statements.
• The size and nature of misstatement also affect the decisions about materiality.
• The significance of an itemon the particular entity.
• The presentation of financial statements and the effect of misstatement in such statements.
• Uncorrected misstatements of the previous period.