Materiality is an entity-specific judgement

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that primary users make on the basis of the financial statements. Three features of that definition are examinable and all three are commonly misunderstood.

It is entity-specific. The Framework and the standards do not specify a quantitative threshold, and no percentage is required or safe. Materiality depends on the nature or magnitude of the information judged in the context of the particular entity's financial report.

It includes obscuring. Since the amended definition, information can be material and still be badly reported: buried in an immaterial aggregate, scattered across the notes, or disclosed in language that hides its significance. Meridian's sixth problem is a materiality failure as well as a presentation one.

It cuts both ways. Materiality permits omission of immaterial information, and IAS 1 makes clear that an entity need not provide a disclosure specified by a standard if the information is not material. Adding immaterial disclosure that obscures material disclosure is a breach, not a safe harbour.

Auditors set quantitative benchmarks for planning purposes, and preparers frequently mistake those benchmarks for the definition. They are not the same thing, and a candidate who answers a materiality question with a percentage will lose the mark.

Worked example 6: Testing four items against Meridian's benchmarks

Indicative planning benchmarks on Meridian's figures look like this.

Now four candidate misstatements.

The third row is the one that turns a chapter 2 issue into a chapter 1 issue. A single contract's deferral of GBP 246,060 is 1.1 per cent of profit before tax and might be argued away individually. Forty of them are GBP 9.84m of revenue recognised too early, which no benchmark makes immaterial. Materiality is assessed on the aggregate effect of similar items, not item by item, and disaggregating a systematic error into individually small pieces is not a defence.

The fourth row shows why qualitative factors decide the close cases. Meridian's GBP 90m floating rate loan carries a net-debt-to-EBITDA covenant. A misstatement that is trivial against profit but flips covenant compliance is material, because compliance is precisely what a lender is deciding about. Similarly, a misstatement that turns a small profit into a small loss, or that moves a reported figure across a threshold in a management incentive scheme, is material at a size that no percentage would flag. The IASB's practice statement on making materiality judgements is helpful non-mandatory guidance on this reasoning, and it is guidance rather than a requirement.