[Anonymous]

Can someone explain Materiality concept using plain English? I just can’t get it. Thank you very much.

[mla1169]

It's the amount that would make a difference to someone using the financial statements to make a decision.

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[jamesjohnson11]

If you are worth ten billion dollars are you lose a five dollar bill, you probably wont care. If you are worth a thousand dollars and you lose one hundred dollars you will probably try to figure out how you lost it.

Same thing with companies. If you have a company like Microsoft who is worth $225 billion and they have accounts receivable of say $20 billion. If at the end of they year the number should be $20 billion but instead it is only say $19.99 billion, they wont really care because it is an insignificant portion of their A/R.

If you have a small company like say jamba juice whose only worth $110 million. If their account receivable is $10 million and it is off by a million then there is a problem because that is a significant part of their A/R.

You often times here people say something like “a million dollars is a rounding error to companies like IBM.” Large companies often don't care about small or even medium sized errors because it would be more work to figure it out then just leaving it. That's what materiality is, it's the amount large enough to affect the financial statements and change way the readers of the F/S sees the company financially.

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[Anonymous]

Thanks Mla1169 and Jamesjohnson11 replied my question.

Your explanation solve my doubt.

[Author]

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