Principle of Materiality

The principle of materiality, also called as materiality constraint states that a financial information can be ignored until and unless it is critical and material to the interest of stakeholders of the business. As such all those accounting standards can be overlooked while disclosing information whose net impact on financial statements is negligible or is immaterial to the users of financial information.

For example, disclosing purchase of a $500 worth non-productive asset is immaterial to a company whose Net Profits run into millions. But disclosing the same is necessary for a company whose total assets are worth $10,000 as this asset is representing 5% of the total assets.

In India, Securities and Exchange Board of India (SEBI) has borrowed the concept of materiality from Securities and Exchange Commission, the US regulatory body. Recently, SEBI has made certain amendments in clause 36 of the listing agreements to make non-event reporting mandatory which will change how company interprets materiality.

Principle of Materiality covers both qualitative and quantitative aspects. Also, materiality is like an unruly horse. It is relative from company to company and subjective from person to person. Therefore it’s up to expertise and sound judgement of the accountants and auditors to understand which information is material and which isn’t.

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