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Definition of Materiality: An Issue Is Defined As Material

The document defines materiality in accounting as whether an issue would influence the opinions of readers of annual financial statements if it were included or excluded. The materiality of information is determined by both its nature and relative size. Even small cumulative issues can be material if their combined influence is material.

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Charielle Esthelin Bacugan
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110 views3 pages

Definition of Materiality: An Issue Is Defined As Material

The document defines materiality in accounting as whether an issue would influence the opinions of readers of annual financial statements if it were included or excluded. The materiality of information is determined by both its nature and relative size. Even small cumulative issues can be material if their combined influence is material.

Uploaded by

Charielle Esthelin Bacugan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Definition of Materiality

In accounting, an issue is defined as material if its valuation


and recognition (including non-recognition) would influence
the annual financial statements or individual positions in those
statements in such a way that the opinion of the reader would
be altered if the issue were taken into account.
The materiality of information is determined by its nature and
relative size. In some cases, the nature of the information
alone is enough to constitute materiality.
If cumulative small issues combine to exert a material
influence on the annual financial statements, they must be
considered as material.

Virtual Case Experience Assurance Academy


PwC 1
Determining Materiality I

1 Company
characteristic

For-profit, profitable For-profit, loss-making For-profit, investment- For-profit company with Not-for-profit company
company company intensive company (e.g. volatile earnings
holding company)

2 Measure
Annual profit before Equity Total assets Net proceeds from Total expenses
taxes trade*

3 Benchmark
in % 3–10% 3–5% 1–3% 1–3% 1–3%

→ Requires extensive knowledge of the client * Average values may be


→ Uses a percentage rate for a given measure appropriate in some circumstances

Virtual Case Experience Assurance Academy


PwC 2
Determining Materiality II

Factor • Characteristics that reduce the benchmark in %

Organisation • Group that regularly buys and/or sells companies


→ Qualitative factors determine the final
application of the benchmark in %
• Complex or extensive accounting standards
Accounting
• Frequent changes to standards

• Frequent changes in the Board of Directors


Responsibility
for supervision
• Frequent changes in the Executive Board
• People who lack qualifications or have inadequate experience
• High share of debt financing
Financing
structure
• Existence of financial covenants
• Low liquidity reserves

Business • Deteriorating market conditions


environment • Impact of foreign currencies

Additional • Additional regulatory requirements (e.g. for publicly held companies)


factors • Frequent changes of shareholders
Virtual Case Experience Assurance Academy
PwC 3

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