Financial Accounting: In an Economic Context

TWO EXCEPTIONS TO THE BASIC PRINCIPLES: MATERIALITY AND CONSERVATISM

Under certain circumstances, the costs of applying the principles of accounting exceed the benefits. In these situations, management is allowed (and, in some cases, required) to depart from the principles. All rules have exceptions, even the measurement principles of financial accounting. Two important exceptions are materiality and conservatism.

Materiality

Materiality states that only those transactions dealing with dollar amounts large enough to make a difference to financial statement users need be accounted for in a manner consistent with the principles of financial accounting. The dollar amounts of some transactions are so small that the method of accounting has virtually no impact on the financial statements and, thus, no effect on the related evaluations and control decisions. In such cases, the least costly method of reporting is chosen, regardless of the method suggested by the principles of accounting measurement. The dollar amounts of these transactions are referred to as immaterial, and management is allowed to account for them as expediently as possible.

For example, the matching principle indicates that the cost of a wastebasket should be included on the balance sheet and converted to expense over future periods because its usefulness is expected to extend beyond the current period. However, the cost of an individual wastebasket is probably immaterial, and it is costly in terms of management's ...