The Materiality Issue

In this month’s installment in our ongoing Millennium Series, two accounting professors give CPA Journal readers the benefit of their three-year study of the elusive concept of materiality and its relationship with probability and likelihood.

The authors placed the language appearing in accounting guidance and other literature from seven English-speaking countries on an eight-point continuum from remote to probable. They found a lack of clarity and specificity in the language describing probability within the existing guidance on materiality.

This vagueness in how probability is defined—and how different countries interpret and apply definitions—is a global problem. It is not only a major obstacle in ongoing efforts toward the hoped-for convergence of accounting standards but also hinders the ability to compare financial and nonfinancial disclosures. As financial reporting becomes more forward-looking, the need for an explicit likelihood dimension in materiality guidance will only become more acute.

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