ACCOUNTING CONVENTIONS - Convention of Materiality

The role of this convention cannot be over-emphasised in as much as accounting will be
unnecessarily overburdened with more details in case an accountant is not able to make an
objective distinction between material and immaterial matters. American Accounting
Association (AAA) defines the term materiality as under :
“An item should be regarded as material if there is reason to believe that knowledge of its
would influence the decision of informed investor”.
Kohler has defined materiality as under :
“The characteristic attaching to a statement, fact, or item whereby its disclosure or the
method of giving it expression would be likely to influence the judgement of a reasonable
person”.
Some of the examples of material financial information to be disclosed are likely fall in the
value of stocks, loss of markets due to competition or Government regulation, increase in wage
bill under recently concluded agreement, etc. It is now agreed that information known after
the date of balance sheet must also be disclosed.
Another example of materiality is the question of allocation of costs. An item of small
value may last for three years and technically its cost must be allocated to every one of the
three years. Since its value is small, it can be treated as the expense in the year of purchase.
Such a decision is in accordance with the principle of materiality. Likewise, unimportant items
can be either left out or merged with other items. Sometimes items are shown as footnotes or in
parentheses according to their relative importance.
It should be noted that an item material for one concern may be immaterial for another.
And similarly, an item material in one year may not be material in the next year.
As per A.S. – 1, materiality should govern the selection and application of accounting
policies. According to the consideration of materiality financial statement should disclose all
items which are material enough to affect evaluations or decisions.