What is the materiality principle in accounting? Details about the materiality principle such as: influence, importance, how to identify material information…
I. What is the key principle?
Materiality is a fundamental accounting principle that requires accountants and auditors to determine the significance of financial information and how that information is presented in financial statements.
According to this principle, information is considered material if its omission or misstatement could influence the economic decisions of users taken on the basis of financial information.
>> Learn more: 7 accounting principles.
II. The importance of the materiality principle in accounting
The materiality principle plays an important role in ensuring that financial statements provide reliable and useful information. If material information is omitted or misrepresented, users of financial statements may make erroneous economic decisions.
➨ Therefore, compliance with the materiality principle helps protect the interests of investors, shareholders and other stakeholders.
III. Impact of materiality principles in accounting
The materiality principle directly affects the process of preparing financial statements and auditing financial statements. Therefore, accountants must assess the materiality of each financial information and decide how to present it appropriately.
This includes determining:
- Which items need to be explained in detail;
- Which items can be grouped together;
- Which items can be omitted without significantly affecting the understanding of the users of the financial statements?
IV. How to identify important information
To identify material information, accountants need to consider many factors, including:
- The size of the information;
- Nature of information;
- Context of information.
Information may be considered material if it is of sufficient importance to influence the economic decisions of users or if it is of exceptional importance.
Assessing materiality requires a combination of professional judgment and specific criteria, helping to ensure that all material information is presented completely and accurately.
For example:
Changes in accounting policies or non-financial events → have a major impact on the business’s operations.
➨ In that case, this information will be considered material.
V. The relationship between the materiality principle and the relevance principle
The materiality principle and the relevance principle are closely related. Specifically:
| Principle of conformity | Key Principles |
| Financial information is required to be relevant and useful to users’ decisions. | Make sure the information presented is important enough to influence that decision. |
Overall, both principles aim at the common goal of providing high-quality financial information that helps users make informed economic decisions.
The combination of these two principles enhances the transparency and reliability of financial reporting, while meeting the needs of stakeholders for the provision of complete and accurate financial information.
>> See more: Matching principle in accounting.
Examples of materiality principles:
A company has annual revenue of VND100 billion. A small accounting error worth VND10 million may not be considered material, because it does not significantly affect total revenue or investor decisions.
However, if the error involves a change in accounting policy or has a significant impact on operating results, it will be considered material even if the amount is small. For example, a change in the way revenue is recognized can affect the way revenue is reported in future periods, which can have a significant impact on investors’ decisions.
➨ Conclusion:
- The materiality principle is an important tool in accounting and auditing, helping to ensure that financial information is presented accurately and reliably;
- Applying this principle not only helps protect the interests of stakeholders but also contributes to improving the quality of financial reporting and enhancing transparency in business operations of enterprises;
- The combination of the materiality principle and other accounting principles such as the matching principle and the prudence principle creates a comprehensive and effective accounting system, supporting businesses in financial management and meeting the requirements of stakeholders.
With its importance and far-reaching influence, the materiality principle is considered the foundation that helps businesses maintain accuracy and transparency in financial reporting, thereby building trust and facilitating sustainable development in the global economic environment.
VI. Frequently asked questions about materiality principles in accounting
1. How to identify material information?
Accountants typically use both qualitative and quantitative assessments to determine materiality. Specifically:
- Qualitative assessment based on the nature of the information;
- Quantitative assessment based on the financial size of the information.
For example, a small error in a large company may not be considered material, but the same error in a small company may have a larger effect and therefore be considered material.
2. What is the difference between material information and immaterial information?
Material information is information whose omission or misstatement could influence the decisions of users of financial statements. Conversely, immaterial information is information whose omission or misstatement would not significantly influence their decisions.
Clearly identifying this difference helps accountants and auditors focus on important information, thereby improving the quality of financial reporting.