Materiality
1. Documentation - financial reporting - risk management.
Materiality 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. Indeed excessive disclosures including non-material items may obscure the understandability of the material items that they are placed around.
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.)
- Value creation over time - Integrated Reporting - <IR>
- "For the purposes of <IR>, a matter is material if it is of such relevance and importance that it could substantively influence the assessments of providers of financial capital with regard to the organization’s ability to create value over the short, medium and long term.
- In determining whether or not a matter is material, senior management and those charged with governance should consider whether the matter substantively affects, or has the potential to substantively affect, the organization’s strategy, its business model, or one or more of the capitals it uses or affects...
- Forms of capital refer to the organization’s resources and relationships and include financial, manufactured, human, intellectual, natural, and social and relationship capital."
- Materiality - International Integrated Reporting Council.
In these contexts, non-material items are sometimes also known as immaterial.
2. Other contexts - significance.
More broadly, the quality of significance in any context.
For example, the statutory whistle-blowing duty in relation to UK occupational pension schemes applies when parties have reasonable cause to believe there is a material problem with the scheme.
3. Assets - tangible assets.
In relation to assets, having a physical nature as a tangible asset, contrasted with an intangible asset.
4. Record keeping.
In relation to records, being held in physical form, as opposed to electronic only.
See also
- Audit
- Capital
- Cross default
- Default
- Dematerialisation
- Double materiality
- Double materiality assessment
- Financial capital
- Financial reporting
- Guide to risk management
- Human capital
- Immaterial
- Intangible assets
- Intellectual capital
- ISA 320
- Loan agreement
- Manufactured capital
- Material adverse change
- Material adverse effect
- Material by nature
- Materialistic
- Materiality assessment
- Misstatement
- Natural capital
- Occupational pension scheme
- Relationship capital
- Risk management
- Social capital
- Stewardship
- Tangible asset
- Threshold
- Trade creditors
- Whistle-blowing
