Materiality

Materiality is a concept used to indicate whether information, an omission, or a misstatement is significant enough to influence the decisions of users relying on financial statements or other disclosures. What counts as material depends on the context and the perspective of the information user, not on an absolute standard.

In financial reporting, materiality guides what should be disclosed and how items are presented. While quantitative thresholds—such as a percentage of net income, revenue, or assets—are common starting points, qualitative factors can override numerical size. The nature of the item, its volatility, regulatory requirements, or potential impact on covenants or compliance can render an otherwise small item material.

In auditing, materiality is used to plan and perform procedures. An overall materiality level establishes the scope and sensitivity of the audit, while performance materiality refines those thresholds for individual accounts. Auditors assess whether accumulated misstatements could change users’ understanding of the financial statements and consider whether detected errors indicate broader issues.

Beyond accounting, materiality appears in law, governance, and decision-making. It denotes information, defects, or contract terms that a reasonable person would deem important to a decision. In sustainability and corporate reporting, materiality analysis identifies environmental, social, and governance issues most likely to affect value or stakeholder decisions, guiding disclosure under frameworks such as IFRS, GAAP, SASB, and TCFD.

Overall, materiality is a judgment-based concept that emphasizes relevance and significance rather than fixed thresholds.