Materiality

Risk management - financial reporting.

This is a threshold at which insignificance becomes significance.

Often it is defined for particular circumstances in loan agreements, for example cross default shall not apply for late payment of a trade creditor for an amount less than a given threshold figure.

Financial reporting & auditing

Materiality is also a fundamentally important concept in financial accounting.

Relevant accounting standards, principles and disclosures need only be applied to material items.

In this context, it is the economic decisions of users - and whether they would be affected by the reporting items being considered - that determine whether the items are material.

Size, nature & context of statements & omissions

"Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

Judgments about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both.

Judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group. The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered."

Materiality in the context of an audit - ISA 320.

Risk management

Similarly in risk management, only material risks require active management.

(While non-material risks can be retained and monitored periodically to ensure that they remain non-material.)

Non-material items are sometimes also known as immaterial.

See also

• Cross default
• Default
• Dematerialise
• Financial reporting
• Guide to risk management
• Immaterial
• ISA 320
• Loan agreement
• Material adverse change
• Material adverse effect
• Materialistic
• Risk management
• Stewardship
• Threshold
• Trade creditors