Kieso, Donald E.||Eiteman, Dean S.
M.S. (Master of Science)
Department of Accountancy
Despite the importance of the doctrine of materiality in external financial reporting, a satisfactory definition of materiality and a theoretical guideline for judging materiality have yet to be submitted. The basic purposes of this study were threefold: (1) to establish a theoretical justification for the adoption of the doctrine of materiality; (2) to develop a theoretical guideline for judging materiality; and (3) to develop a new definition of materiality—all three relative to the communication of financial information to the investor group. Two justifications proposed by some accountants were also evaluated in this study. The data for this study was obtained from the following sources: periodical literature and related studies; the publications of the American Accounting Association; and the publications of the American Institute of Certified Public Accountants. The following major conclusions were drawn regarding the adoption of the doctrine of materiality in the communication of financial information to the investor group: (1) Both justifications, (a) savings in bookkeeping cost and (b) separating the important information from the unimportant, fail to expose any logical guideline for judging materiality. Financial information is used for comprehending and evaluating the consequences of investment alternatives. It is pertinent to treat expediently some items, facts, or statements if their disclosure would not make a difference in an average investor's comprehension and evaluation. Hence, accountants are justified in adopting the doctrine of materiality to screen financial information. (2) The guideline for judging the materiality of an item, fact, or statement of financial information should be that the knowledge of such information would make a difference in an average investor's comprehension and evaluation of the consequences of investing in a particular corporation. (3) The following statement is submitted as a pertinent definition of materiality: An item, fact, or statement of financial information is material, if the knowledge of such information would make a difference or change in an average investor's comprehension and evaluation of the consequences of investing in a particular corporation. The materiality of such information refers to its character of being material.
Fong, Siew-low, "Materiality in external financial reporting" (1967). Graduate Research Theses & Dissertations. 3898.
ii, 51 pages
Northern Illinois University
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