Rescinded [2017-04-01] - Accounting Standard 2.2 - Treasury Board - Materiality

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Note to reader

The following sections of the Handbooks contain useful reference material: PSAB 1400 and 1500, CICA 1000 as well as section 5130 of the Assurance Handbook and Aug 7 Applying Materiality and Audit Risk Concepts in Conducting an Audit.


1. Paragraph 1000.17 of the CICA handbook contains the following on materiality: "Users are interested in information that may affect their decision making. Materiality is the term used to describe the significance of financial statement information to decision-makers. An item of information, or an aggregate of items, is material if it is probable that its omission or misstatement would influence or change a decision. Materiality is a matter of professional judgement in the particular circumstances."

2. To understand how any piece of information may influence or change a decision, there must be an appreciation of potential readers of the information and the range of decisions they may make.

3. There are two basic types of users of financial information: those internal to the organization and users external to the organization.

4. Examples of external users include suppliers, journalists, investors, unions, creditors, lenders, other jurisdictions, special interest groups and international organizations. The list of possible decisions and assessments these people may make is virtually endless. Some examples are:

  1. Assess government's compliance with various regulations;
  2. Determine capacity for future program delivery;
  3. Give a credit-rating; and
  4. Find out how much revenue has been raised from user fees.

5. Internal users include parliamentarians and members of the public service. As with external users, the list of potential decisions is virtually endless. Examples include:

  1. Determine what services can be provided at what cost;
  2. Plan for future funding requirements for asset maintenance and replacement;
  3. Manage cash position and financing requirements; and
  4. Find ways to deliver services more efficiently.

6. Given this range of users and decisions, it may be very difficult to say with any degree of confidence that a particular piece of information would not influence a decision. This would suggest that all financial information be recorded and reported in copious detail. However, too much detail would make most financial reports too confusing for users. Properly applying the concept of materiality ensures that for all financial reporting sufficient and appropriate information is presented in such a manner as to assist the user in the decision-making process.

Materiality requirements

7. There is no general rule of application for materiality. Materiality depends on circumstances.

8. There are two aspects to the application of materiality:

  1. Quantitative Materiality - Auditors have determined quantitative materiality to range between 1/2% and 2% of total expenses, depending on the size of the department or agency. This threshold is applied to the aggregate of all errors and misstatements, not on an individual item basis. These percentages are a guideline only; items below the threshold are probably not material, items exceeding it probably are. In neither case does the application of these percentages definitively determine materiality.
  2. Qualitative Materiality - The qualitative aspect recognizes that materiality cannot be determined solely by means of the application of a numeric threshold. There are many instances, beyond consideration of influence in decision-making, where an item may be material even though low-dollar. Some qualitative considerations are:
    1. Deviations from PSAB, CICA recommendations or the requirements of Treasury Board Accounting Standards and other policies - materiality is not a licence to disregard the rules;
    2. Potential effect of a misstatement on trends and their analysis by users;
    3. If the misstatement affects determination of an entity's compliance with legislation, regulations, etc.;
    4. Nature of the misstatement - does it arise from an item that can be accurately and objectively measured, or arise from the subjectivity of estimated amounts;
    5. Potential of offsetting effects of individually material misstatements;
    6. Immaterial now, but may become material in future with accumulation over several periods;
    7. Motivation - using materiality to manage financial reporting results, continuing unwillingness to correct known weaknesses in the financial reporting process, etc.; and
    8. Misstatement on segment information.

9. The CICA Assurance Handbook lists suggested quantitative guidelines and includes a caveat that they are not a substitute for the auditor's professional judgement as to what he or she considers to be material but are to be used only as an aid in developing those judgements. The same caveat applies to any quantitative measures: these measures should not substitute for the professional judgement of departmental financial personnel.

Application of materiality

10. Materiality can be impacted both through policy and through the application of policy at a transaction level. Generally speaking, a policy has a more significant impact on materiality than the application of a policy at a transaction level. As an example, if the Government of Canada were to adopt a policy that is contrary to PSAB, all transactions applied in accordance with the Government's policy would be contrary to PSAB. In their aggregate they could potentially represent a material deviation from PSAB and result in a qualified audit opinion on its financial statements from the Auditor General. Individual transactions, that are accounted for incorrectly, are less likely to be material on the overall financial statements. As such, policy must be designed and applied in such a manner as to not result in any material error or mis-representation in financial reporting.

11. Although most accounting literature discusses materiality from the standpoint of reporting and auditing, reporting and auditing are after the fact; departments must apply the concept of materiality primarily when recording individual transactions. The detail and accuracy used to collect and record the information determines the possible detail and accuracy of the information in any financial reports.

12. Materiality at a transaction level determines:

  1. When a transaction is recorded or the frequency of recording, examples being:
    1. Theoretically, transactions for the purchase of goods and services should be recorded on receipt of those goods or services. In practice, many departments record the transaction on receipt of the invoice. During the year, this is not likely to have any material impact, however, at year-end, accruals should be recorded for significant amounts.
    2. Month-end accruals for overtime and other non-regular salary items may not have to be recorded.
  2. The classification of the elements of the transaction, examples being:
    1. In theory, the payment of a two-year magazine subscription should be recorded as an asset and allocated to expense over those two years. In all likelihood, the amount involved is too small to influence any decision and would be expensed in the year the subscription is obtained; or
    2. Some departments have mixed inventories, that is, items that are both for resale and for internal consumption. These departments may record the entire inventory as inventory for resale or for consumption, depending on what is the majority. Although not completely accurate, it is unlikely to influence a decision, and so is not material.

13. As applied at the detail transaction level, materiality is an important element in designing the accounting policies and practices of a department or agency. In developing policies and procedures, the following should be considered:

  1. Materiality should be an opportunity for departments to design accounting policy to take into consideration administrative ease in the handling of certain types of transactions. However, this must be done within the overall materiality limits noted above and without deviating from the recommendations of CICA, PSAB or TBAS.
  2. Departments must apply the principle of consistency. Similar transactions should be accounted for the same way. As well, they should be accounted for the same way across different periods. When a change is accounting policy is deemed appropriate, then appropriate disclosure of the change should be made in the notes to the financial statements in order to maintain comparability between periods.
  3. Policies and procedures designed to ensure the most detailed information is recorded properly will automatically ensure that the requirements for reporting are met.

14. Application of materiality in reporting determines what information is shown at what level of detail.

  1. Specific Purpose Financial Reporting - Specific purpose reports are included in Volume II of the Public Accounts. Where a report has the word "other" in one or more column headings, a materiality limit has been applied: some types of information have been deemed not important enough to appear separately and have been aggregated. In some reports, Ex Gratia Payments for example, there is no materiality limit and all details are reported.
  2. General Purpose Financial Statements - The CICA and PSAB Handbooks provide accounting and financial reporting standards that are to be applied in external financial statement reporting.
  3. Management Reporting
    1. The major distinction between managers and users of financial statements is the level of decision-making. Managers make operational decisions. These decisions generally require a greater amount of information, in greater detail, than that provided by financial statements.
    2. It follows that if the level of decision-making is lower, the amount that would influence a decision is lower as well. Thus materiality amounts are considerably lower than those for general purpose financial statements.

15. With very few exceptions, the concept of materiality does not apply in recording and reporting on appropriations usage; all amounts are important.