The convention of materiality and full disclosure

Convention of materiality. Materiality is best understood in its negative sense: information need not be disclosed separately unless its omission would vitiate the true and fair character of the financial statements. Whether an item is material depends on its size or on the importance of the information to the users, and so on the nature and size of the firm and the accountant's judgement. In the American Accounting Association's words, an item is material if there is reason to believe that knowledge of it would influence the decision of an informed investor. Less important items are left out or merged; more important ones are shown, by a footnote or otherwise.

Examples

• A bottle of ink or a box of stationery, though used over several periods, is written off as an expense when bought; treating it as an asset and spreading its cost would be pointless.
• Figures are rounded to the nearest rupee, thousand or lakh in published statements.
• A loss of ₹5,000 is immaterial for a company with a turnover of ₹500 crore but material for a small shop; a change in accounting policy, or a large contingent liability, is material by its nature and must be disclosed.

Does materiality contradict full disclosure? No. Full disclosure requires the accountant to disclose all material facts necessary for a complete understanding of the statements by third parties; it does not mean disclosing every minor detail, which "is neither possible nor desirable". Materiality is the test that decides which facts full disclosure must cover. The two conventions therefore work together: full disclosure ensures nothing important is hidden, and materiality keeps the statements free of insignificant detail so that the important information stands out.