The Concept Of Immateriality Essay

Question:

Explain, with Suitable examples from your Workplace, what is meant by an Immateriality item with respect to Accounting. References should be made to the relevant accounting Concepts and Standards.

Answer:

Immateriality accounting refers to the application of the concept of materiality. The information of immateriality doesn’t considerably impact user’s decisions, like owners and managerial authorities. Accountants are required to make use of expert judgment to conclude either the amount is immaterial or not. There is a need of defining materiality level for the financial records (Edgley, 2014). Thus, when an aggregate of inaccuracy is held in the total level of materiality than in leads to misleading of financial records. While determining immateriality, it is important to make consideration of the manner and size of the specific item. By considering the manner or nature refers that if a small amount transaction is taking place abnormally it can be material, but in case it is a daily transaction it can be immaterial. For example, at my workplace huge amount of papers are used in banking transaction however its cost is immaterial for business as it is used on a daily basis even for nominal work.

The concept of immateriality also affects accounting provisions as all accounting transaction cannot have same effect irrespective of the fact that they belong to same nature of assets. In relation to banking business both computers and calculators are considered to be an asset and have a useful life of more than one year but computers are recorded as fixed asset and calculator is covered the cost of stationery which is recorded as an expense due to the concept of immateriality. It is all because of the cost associated with the assets (Hu, 2013). Recording calculators as an expense will not affect financial statements as it has nominal costs for banks Furthermore recording depreciation on calculators is not a sane aspect in banks as it will unnecessarily make accounting process length and irrelevant. This concept clarified the fact that superseding of matching concept will not have a significant impact on the financial statements for the banking company.

In terms of accounting, professional judgment is required to determine whether the accounting transaction or event is material or immaterial. It is because when $5,000 is assessed as the immaterial amount for an international company but for the small bank, it can be considered as a material amount. Consideration of materiality is not done by item’s monetary amount; it is done by the item’s nature. Several factors inclusive of either the item is engaged in illegal transactions, must be assessed while verifying materiality (Cameron, 2014). For example, an amount like $.50 or $.30 is immaterial individually, but same is material for the bank as cumulatively it becomes material amount because banks have thousands of such transactions on a daily basis. Due to this fraud like transferring minute amount, several times to a single account is material fraud.


Bank has to deal with various organisations as it is public body thus they are required to provide their services accordingly. These transactions create various assets and liabilities but not all considered to the material. At my workplace, judgement of immateriality is based on the percent of revenue. If a transaction is within the limit of 3% of total revenue or asset, then same is considered to be immaterial, and manipulations or other related aspects are ignored if it occurs occasionally. Take an example of a noticeably immaterial item; there is a $100 prepaid of rent on a post office box for six months; according to the matching principle, charging the rent as an expense on six months is required (Acito, Burks, & Johnson, 2016). However, as the transaction amount is so minute that the financial statements reader will not be misinformed if the entire amount is charged as an expense to the particular period instead of scattering the same over the usage period. In point of time, when the figures of financial statements are rounded to the nearest thousand or million dollars, then this accounting transaction will not make any alteration the financial statements at all.

The concept of immateriality is crucial for banking entity as it assists managerial authorities on focusing on crucial factors which can affect the decision of rational stakeholders. For this aspect, it is important for managers, to prioritise the strategic aspects they required to focus (Kov?cs, 2015). This approach also assists in better planning and allocation of resources in order to achieve the objective of optimum utilisation. Along with this, financial statements of business become more viable as it is prepared by considering the significance of the day to day transactions.

Present study clarifies the fact that immateriality is subjective concept according to which company measure and disclosure transaction which are sufficiently material and can affect the interest of stakeholders.

References

Acito, A., Burks, J. J., & Johnson, W. B. (2016). The materiality of accounting errors: evidence from SEC comment letters and implications for research proxies.

Cameron, R. (2014). Applying the Materiality Concept: The Case of Abnormal Items. CORPORATE OWNERSHIP & CONTROL, 428.

Edgley, C. (2014). A genealogy of accounting materiality. Critical Perspectives on Accounting, 25(3), 255-271.

Hu, M. (2013,). Pondering over the Problems of Immaterial Assets. In 2013 Conference on Education Technology and Management Science (ICETMS 2013). Atlantis Press.

Kov?cs, Z. I. (2015). Immaterial Assets in the Hungarian Accounting System and Financial Statements. Public Finance Quarterly, 2, 227.

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