How is “materiality” defined in the
to The Financial Accounting Standard Board’s website (2008), materiality is a concept
that relates to qualitative aspects. Materiality is defined as what or who
influences someone who makes decisions or someone who invests. Materiality
influences whether or not a decision should be disclosed for certain
information from investors or because the items are too small to make a
difference. Material judgments involve screens or thresholds (FASB, 2008, Concept
Statement 2, CON2-28-29, Paragraph 123-126).
The concepts statements provide several
examples in which specific quantitative materiality guidelines are provided to
firms. Identify at least two of these examples. Do you think the materiality
guidelines should be quantified? Why or why not?
FASB (2008) website mentioned several examples of quantitative materiality
guidelines. Some of the examples are under subject, authority, and materiality
guidelines. Under subject, the reporting should be segmented and the reportable
segment should be recognized. There should be a gross rental expense under
leases. There should also be proof of oil and gas reserves. The earnings per
share (EPS) should be diluted. The items on the balance sheet should have a
separate disclosure. Under the materiality guidelines, EPS should be reduced to
less than 3% in the aggregate. Total rental expense should be disclosed if
gross rents are more than 1% of consolidated revenue. Details of receivables
should be disclosed from any officer or principal stockholder if it $20,000 or
more or 1% of total assets (FASB, 2008, Concept Statement 2, CON2-36, Table 1).
I think the materiality guidelines should be quantified because it is simpler
than the qualitative analysis.
The concepts statements discuss the
concept of “articulation” between financial statement elements. Briefly
summarize the meaning of this term and how it relates to an entity’s financial
to The Financial Accounting Standard Board (2008) website, articulation is the
interrelation of elements. The elements of financial statements are categorized
into two types which are analogous to photos and motion pictures. Assets,
liabilities, and equity (net assets) are in the first type that is used to
describe levels or amounts of resources at a period of time. Other elements are
used to describe the effects of transactions and other actions (FASB, 2008,
Concept Statement 6, CON6-10, paragraph 20). Comprehensive income and its
components are included in the second type. The first type can be changed by
elements in the other type and at any given time are their cumulative result.
Also, an increase or decrease in an asset, liability, or equity cannot take
place without an increase or decrease that corresponds to another asset,
liability, or equity. Financial statements with the first type depend on the
second type and vice versa (FASB, 2008, Concept Statement 6, CON6-11, Paragraph