In providing information with the qualitative characteristics that render the information useful, the constraint of materiality may affect what is included and excluded from the financial information reported. Explain the concept of materiality
An item is material if its inclusion or omission would influence or change the judgment of a reasonable person. The omission of a material item would have an impact on the decision a reasonable person would make.
Materiality varies both with the relative size and relative importance of an item. If an amount is significant when compared with some other financial statement element, then the amount should be included in the financial statements in accordance with the applicable accounting standard involved.
The nature of an item may be an important consideration in determining if the item is material. Amounts that relate to violation of the law or fraudulent transactions may require disclosure. Items that may be important in terms of possible consequences arising from contractual obligations (such as failing to comply with a debt covenant with the result that a material loan may be called) also may require separate disclosure.
The SEC currently is paying particular attention to the concept of materiality. An "immaterial" adjustment, for example, that changes a loss to a profit, helps maintain an earnings trend, or impacts management compensation under a bonus plan may be scrutinized by the Commission. The Commission is particularly interested in adjustments that represent intentional misstatements that individually are immaterial but collectively have a material effect on the financial statements.
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