What is materiality?
Not every error or detail matters. Materiality helps accountants and auditors focus on what would change a reader's view of the business. The IFRS Conceptual Framework defines information as material if omitting, misstating or obscuring it could reasonably be expected to influence users' decisions.
Quantitative materiality
Auditors often set an overall materiality threshold using benchmarks, such as:
- 5% of profit before tax
- 0.5% to 1% of revenue
- 1% to 2% of total assets
These are rules of thumb, not fixed requirements.
Qualitative materiality
Some items are material regardless of size:
- Related-party transactions
- Fraud or illegal acts
- Items that turn a profit into a loss
- Breaches of loan covenants
- Errors in director remuneration
How it's used
- Deciding what to disclose in the notes
- Setting capitalisation thresholds for small purchases
- Planning audit testing and evaluating errors found
Example
A company with $10 million profit finds a $5,000 misclassification. That is likely immaterial. But a $5,000 payment to a director that wasn't disclosed may be material because of its nature.