Moneyzine
Contents
/Investment Guides /Materiality Constraint

Materiality Constraint

Moneyzine Editor
Author: 
Moneyzine Editor
1 mins
February 8th, 2024
Advertiser Disclosure
Materiality Constraint

Definition

The term materiality refers to an accounting constraint that is used to determine the relative importance or value of an item to one of the company's financial statements. If an item is not deemed significant enough to influence the decision-making process of an individual examining the company's financial statements, then that item is not considered material.

Explanation

Material items can include the purchase price of an asset, a transaction with a supplier or customer, and even news. Materiality will also vary with the size of the company. Larger companies will have higher thresholds, since it will take greater dollar values to have any meaningful impact on the company's financial statements. For this reason, the FASB has not issued any direct accounting guidance to indicate what is considered material.

Many companies establish internal guidelines, or constraints, for materiality. These guidelines may apply to revenue, profits, assets, and expenses. For example, a company with $10 billion in revenues might decide to expense the purchase of a $500,000 software program, even though the application is expected to provide benefits beyond the current accounting period. The work, and cost, associated with creating an asset and tracking its depreciation expense would likely outweigh any benefit.

To a smaller company, one with $5,000,000 in revenues, the purchase of a $500,000 software program will likely be deemed material, since the purchase price is 10% of the company's revenues. A company of this size might decide to capitalized the purchase, create an asset on the balance sheet, and expense the purchase over its serviceable life.

Related Terms

  • Assets
    The accounting term used to describe an economic resource, which is owned by the corporation and expected to provide future benefits to its operation, is asset. Appearing on the balance sheet, assets are typically broken down into two categories:
    Moneyzine Editor
    Moneyzine Editor
    January 5th, 2024
  • Expenses
    The term expense is used to describe the outflow of money to pay for a product or service. In financial accounting, expenses are defined as the cost of goods sold, or services used up, in the process of producing revenues for a company. The expenses of a company are reported on the income statement.
    Moneyzine Editor
    Moneyzine Editor
    November 29th, 2022
  • Cost Benefit Constraint
    The term cost / benefit constraint refers to an accounting constraint that states the cost of providing information must be measured against the benefit derived from the use of that same information.
    Moneyzine Editor
    Moneyzine Editor
    January 12th, 2024
  • Industry Practices Constraint
    The term industry practices constraint refers to an accounting constraint that states the preparation of financial statements for some industries require a departure from what would be considered standard accounting practices.
    Moneyzine Editor
    Moneyzine Editor
    January 22nd, 2024
  • Conservatism Constraint
    The financial accounting term conservatism constraint refers to an accounting constraint that states when in doubt, report information that does not overstate income or assets or does not understate expenses or liabilities.
    Moneyzine Editor
    Moneyzine Editor
    January 11th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.