Mistaken idea “Materiality is a fixed percentage”

Correction

A percentage alone cannot determine whether an error matters to financial statement users. Consider the amount, its nature, and the circumstances in which readers would use the information.

Explain materiality in accounting

Materiality concerns the importance of omitted or misstated information to a reasonable user's judgment about the report. The Financial Accounting Standards Board's framework asks whether including or correcting the item would probably change or influence that judgment, given the circumstances. Here, material does not mean physical substance. A numerical benchmark can help organize the analysis, but it cannot settle every reporting decision.

Compare the consequences

Harbor Design finds an expense error that is small relative to annual revenue. Correcting it would show that the company failed a condition in its loan agreement. A lender may care about that consequence even though the percentage looks small.

Now suppose an equally sized error merely moves an expense between two internal categories that appear together in the same reported line. The percentage is the same, but the reporting consequences differ. Neither example permits a conclusion from size alone; other facts may also matter.

Check your answer

Identify what the error changes for the reader. Consider related errors together and check whether the error changes a trend, a reported result, or compliance with an important condition. Do not assume every small error is immaterial or every loan-related error is automatically material.

The Securities and Exchange Commission's Staff Accounting Bulletin 99, Materiality explains why quantitative thresholds alone are insufficient in its reporting context.