I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART B: THE QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION 

 

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The predictive and confirmatory roles of information are interrelated. Information on financial position 

and performance is often used to predict future position and performance and other things of interest to 

the user, eg likely dividend, wage rises. The manner of showing information will enhance the ability to 

make predictions, eg by highlighting unusual items. 

The relevance of information is affected by its nature and materiality. 

3.1.1 Materiality 

'

Materiality

. Information is material if omitting it or misstating it could influence decisions that the 

primary users of general purpose financial reports make on the basis of those reports which provide 

financial information about a specific reporting entity.' 

 

(Conceptual Framework for Financial Reporting 2018, para. 2.11) 

 

Information may be judged relevant simply because of its nature. In other cases, both the nature and 

materiality of the information are important.  

An error which is too trivial to affect anyone's understanding of the accounts is referred to as immaterial. 

In preparing accounts it is important to assess what is material and what is not, so that time and money 

are not wasted in the pursuit of excessive detail. 

Determining whether or not an item is material is a very subjective exercise. There is no absolute 

measure of materiality. It is common to apply a convenient rule of thumb (for example, material items 

are those with a value greater than 5% of net profits). However, some items disclosed in the accounts 

are regarded as particularly sensitive and even a very small misstatement of such an item is taken as a 

material error. An example, in the accounts of a limited liability company, is the amount of remuneration 

(salaries and other rewards) paid to directors of the company. 

The assessment of an item as material or immaterial may affect its treatment in the accounts. For 

example, the statement of profit or loss of a business shows the expenses incurred grouped under 

suitable captions (administrative expenses, distribution expenses etc); but in the case of very small 

expenses it may be appropriate to lump them together as 'sundry expenses', because a more detailed 

breakdown is inappropriate for such immaterial amounts. 

In assessing whether or not an item is material, it is not only the value of the item which needs to be 

considered. The context is also important. 

(a) 

If a statement of financial position shows non-current assets of $2 million and inventories of 

$30,000, an error of $20,000 in the depreciation calculations might not be regarded as 

material. However, an error of $20,000 in the inventory valuation would be material. In other 

words, the total of which the error forms part must be considered. 

(b) 

If a business has a bank loan of $50,000 and a $55,000 balance on bank deposit account, it 

will be a material misstatement if these two amounts are netted off on the statement of financial 

position as 'cash at bank $5,000'. In other words, incorrect presentation may amount to material 

misstatement even if there is no monetary error. 

3.2 Faithful representation 

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