GAAP_Materiality 一般公认会计原则

GAAP-Materiality
This discussion focus on the objectives, description and application of this principle. Examples will be given to strengthen the understanding and capability to apply this principle at real situation.
Objective: To concern about an item’s impact on a company’s overall financial operations.
Description:
- An item is material if its inclusion or omission would influence or change the judgment of the users. Likewise, if it would have no impact on a decision maker, it is immaterial. Application:
Companies and auditors in Macau generally adopt the rule that anything between $2,000 to $10,000 is considered immaterial and other factors should also be considered when deciding the percentage. Different standards for the level of immateriality are practiced in different types of companies and different countries.
Scenario I
Company A has an advertising expense of $3,000 while Company B $30,000. When we compare the two amounts in Company A and B, can you have a conclusion that the advertising expense in Company B is more material than Company A?
Ans: No.
Explanation:
a. Since we do not have any standard for the monetary value for the level of materiality, we cannot tell whether the amount can influence the users or not.
b. We do not know the size of both companies so we do not know how the two figures can affect the decision making of the users.
c. If both companies use 5 percent of net income as the base of the monetary value for the level of materiality, it will be easier for us to decide. If the net income of company A is $40,000, the advertising expense is 7.5 percent of the net income. In this way, we can consider the advertising expense in Company A is material. On the other hand, if the net income of Company B is $800,000, the expense will be 3.75% of the net income which is considered to be immaterial. Although managers and auditors consider the advertising
expense in Company A is more material than that in Company B, the amount will still be recorded in both companies’ income statement. Therefore, we cannot just look at the figure in deciding whether the amount is material or not. We also need to analyse the proporation of this expense with the net income so that we can know how influential the amount is to all the users.
d. In some companies, they may not base on the percentage of net incom
e. Instead they would set a monetary value for the level such as $2,000. In this case, those items under $2,000 will be treated as immaterial and it may not affect the decision making of the users.
Scenario II
Company C has purchased a magnet board which costs $120. A magnet board is regarded as a kind of office supplies which is an asset of the company. The magnet board is estimated to be used for 5 years. Since it can be used more than one year, it is regarded as a non-current (fixed) asset. Therefore, depreciation for the magnet board has to be calculated at the end of the year when preparing the Statement of Financial Position (Balance Sheet). After calculation, the depreciation for the magnet board every year is $24.
Entries:
Dr Depreciation $24
Cr Accumulated Depreciation $24
Issue:
Do you think that it is cost-effective in recording the depreciation of the magnet board for 10 years?
Ans: No.
Explanation:
a. It is a usual practice in recording the depreciation for non-current assets (ignoring the value of the non-current assets).
b. $24 of depreciation is comparatively a very small amount since you may find the unit used in most of the financial statements is ‘k (thousand) or m (million). In this way, you can hardly find the impact of the $24 in the financial statements and the decision making of the users.
c. A certain amount of resources has to be allocated in keeping its records for 10 years in the financial statements which is not cost-effective at all.
d. If the company has standards for the level of materiality which is $100 to $2,000 already, we can assume that the $120 magnet will not affect the decision making of the users, therefore, it will only be expensed off during the year. (Record the amount as an expense in the Income Statement)
Solution:
Company can always establish a standard or guideline for the monetary value of materiality. For example, if items between $200 to $2,000 is set as a cut-off value, the magnet board will be treated as an office supplies expense rather than office supplies (non-current assets). Consequently, the records of the transactions are more realistic and materiality can also provide flexibility to certain extent in dealing with decision making and auditing.
Notes:
In establishing the guideline for materiality, disclosure must be added (to Disclosure Documents or Notes to Financial Statements) so that the decisions makers can have a fair and clear picture of the financial statements.。