Accounting Materiality Case Essay Example for Free

Accounting Materiality Case EssayAfter the release of the SFAC No. 8, your definition of materiality has been brought into question. In the past, your rule for determining materiality was based solely on quantitative data, where an event was solo material if its advert was more than a given character of the income statement heart and souls. Using a quantitative measure is effective because it keeps the process objective however there are also times when the quantitative release doesnt adequately demonstrate the true effect of an action. For this reason, materiality is an entity-specific aspect of relevance based on the nature quality or magnitude quantity or some(prenominal) items, as stated in Q11 of the SFAC No. 8. For The Framework confederacy each of the following closing entries must be judged on a private level on the parameters of whether it could influence decisions that our users make.See more Ethnic groups and racism essay1)In this entry, the caller- away is pa ying a fine of a foreign subsidiary. The amount is less than 3% of net income, making it quantitatively immaterial. The description of the case lists that after the fine is paid, business will go back to normal with only slight changes. However, this is qualitatively material because it shows that the company did something unlawful which makes users question the companys integrity and ethical standards.2)This entry shows an investment in an expansion of the company. The impact on the company amounts to only 4.3% of its total assets (it was predetermined that the bar for materiality is 5%) so it is not quantitatively material. However, in terms of this action affecting a users decision about the company, this entry is definitely material. It represents an expansion of the company which users can either see as promising for rising growth or frightening because its a risky investment.3)Generally a loss, no matter the size isnt seen as material due to the detail that it tends to be a atomic number 53-time thing, compared to an expense that occurs regularly. However, in this case the amount of the loss proves to be material both quantitatively and qualitatively. Its impact on net income is higher up the 3% predetermined materiality threshold, making it quantitatively material. Also, it was determined that more of these losses may be coming in the near future for this linage and that its becoming more delinquent. These two qualitative aspects are very impactful for a users decision regarding the company because they show serious problems with one of the companys most profitable line and puts huge question marks on the quality of the product.4)In this entry, the management made the decision to self amaze based on a court case of a similar company. The amount of additional expense accounts for 4% of the net income, making it a quantitatively material. The main reason this decision is also qualitative is due to the fact that the additional $200,000 in expenses n eeds to be explained to the user to show that The Framework Company is being responsible and cautious by policing themselves.5)The ruling in a litigation case is that The Framework Company owes credit customers 325,000 in damages, which is 6.5% of net income. The company plans to appeal the case and believes they have a good defense in that appeal. A large portion of their customer base was involved in this case, kernel if the ruling is overturned some of their customers could take their business elsewhere. That makes this entry both quantitative and qualitatively material.6)This 200,000 dollar loan that didnt show up in the fiscal statements would only increase the assets by 0.08%, making it quantitatively immaterial. This event is a one-time occurrence for the company, because the chance of a payment being mishandled should be small. Since it is a small portion of the balance sheet and is something that wont frequently happen, this entry is quantitatively and qualitatively immate rial.Based on The Framework Companys current accounting standards, this set of post-closing entries is quantitatively material because the sum of all the changes is greater than 3% of their net income and equal to 5% of assets. Even if the sum of the changes didnt surpass the preset threshold, it would still be smart to report these entries based on the idea of conservatism. The accountants are responsible for the information released, so if they leave something out that a user would deem important, they are liable. So, when in doubt, its best to release the information.The SFAC No. 8 mentions a number of times that cases of materiality, such as this one, cannot be decided by a general set of standards. The concept of materiality is too difficult to restrain. Under our current system, the expansion branch (entry 2) would be considered immaterial due to is size relative to our total assets. However, this entry really is material because it means so much to the future of the company a nd thats what financial report users are looking for. The only standard that can be set when dealing with materiality is does this entry influence decisions that users make on the earth of the financial information (SFAC No. 8, Q11).