The materiality principle is an accounting concept that states that financial information should be disclosed or reported if its omission or misstatement could influence the economic decisions of users of financial statements.
Materiality is assessed based on the nature, size, and significance of an item or error relative to the overall financial statements and the needs of users. Materiality considers both quantitative factors, such as the monetary amount or percentage of an item, and qualitative factors, such as the nature of the item, its impact on financial ratios, regulatory requirements, and user expectations. Material items or errors that could affect users' decisions include significant revenues, expenses, assets, liabilities, contingent liabilities, related party transactions, accounting policy changes, and errors in financial statements.
The materiality principle guides accountants and auditors in determining the appropriate level of detail, disclosure, and treatment of financial information to ensure its relevance, reliability, and transparency for users making economic decisions. Materiality assessments require professional judgment and consideration of the specific circumstances and context of each reporting entity, aiming to provide users with meaningful and reliable information to support informed decision-making and financial analysis.