Which of the following statement(s)is/are true with respect to materiality?
A)It refers to the notion that an item need not be recognised in the financial reports.
B)It is a primary qualitative characteristic.
C)It relates to financial information where its omission or misstatement could influence the economic decisions of users.
D)All of the given answers.
E)Equipment under lease where the risks and rewards flows into the entity and it relates to financial information where its omission or misstatement could influence the economic decisions of users.

Question

Quizplus · Accepted Answer

The concept of materiality in financial reporting is an important principle that helps determine the relevance and necessity of information in financial statements. Here's an analysis of the given statements:
1. It refers to the notion that an item need not be recognized in the financial reports.
This statement is partially true. Materiality does imply that certain items may not need to be recognized in the financial reports if they are deemed immaterial, meaning their omission or misstatement would not influence the economic decisions of users. However, it does not mean that any item can be omitted; only those that would not have a significant impact on the users' decisions.
2. It is a primary qualitative characteristic.
This statement is not entirely accurate. Materiality is considered a pervasive constraint rather than a primary qualitative characteristic. The primary qualitative characteristics, according to the conceptual framework for financial reporting, are relevance and faithful representation. Materiality is related to relevance but is not a characteristic on its own.
3. It relates to financial information where its omission or misstatement could influence the economic decisions of users.
This statement is true. Materiality is concerned with whether the omission or misstatement of an item could influence the economic decisions of users. If it could, then the item is considered material and should be included in the financial reports.
4. All of the given answers.
Since not all the given statements are entirely true, this option is incorrect.
5. Equipment under lease where the risks and rewards flow into the entity and it relates to financial information where its omission or misstatement could influence the economic decisions of users.
This statement seems to be a mix of two concepts: materiality and the recognition of leased assets. Materiality, as previously mentioned, relates to the importance of financial information. The risks and rewards associated with leased equipment are part of the criteria for recognizing a lease under accounting standards such as IFRS 16 or ASC 842. If the risks and rewards of ownership transfer to the lessee, the leased asset and liability should be recognized on the balance sheet. The materiality of the leased equipment would then be considered in terms of whether its omission or misstatement could influence economic decisions.
In conclusion, statement 3 is the most accurate with respect to the concept of materiality. It correctly captures the essence of materiality as it relates to the potential impact of financial information on the decision-making of users.

Which of the Following Statement(s)is/are True with Respect to Materiality