Concept of Materiality

Perfection is an illusion…..

Users and other stakeholders want financial statements to provide “true and fair view” not “perfectly fair and true view” of the financial situation of an entity.

Therefore, a company will tolerate a certain level of imperfection in their accounting records resulting from human or system errors. The tolerance level that will not hurt or impair the decision making based on those records, is called materiality.

Great care and integrity is a must.

It is important to mention, that materiality as a threshold provides no free pass for any intentional manipulation of the records to achieve certain outcome, even if remaining just “below the threshold”.

Negligence can be costly.

The lack of knowledge and/ or care, poorly performing systems, or missing controls will naturally result into errors in accounting records that might become material over time.

As a result, the company might get punished from a law enforcement and pay a fine. It might also get punished by the stock market in a form of a falling share price.

And the football bit? Here is an example on the concept of materiality right from the football field:

Due to a lack of expert accounting knowledge the FC Liverpool reports a year worth of salary for Jürgen Klopp under discontinued operations after he announces his departure from the club.

Considering the high salary amount and the resulting impact on the operating profit this would be a material error in terms of wrong presentation (check also the new Hashtag#IFRS18).

On the other hand, the same club erroneously reporting a one-off contribution of 10 thousand GBP to one charity (they support more than 106 altogether) as a financing expense is an immaterial presentation error.

As long as this error remains isolated, is not done on a purpose, repeatedly and proper care is taken to avoid similar errors the future.