Materiality Principle: An accounting principle that states that financial

reports only need to include information that will be significant (material) to

their users. For example, an audit report would not need to specify the

number of paper clips used by a bank. For a large corporation, an

expenditure of a few thousand dollars would not be material, but for a

smaller company it might be. The materiality principle states that an

accounting standard can be ignored if the net impact of doing so has such a

small impact on the financial statements that a reader of the financial

statements would not be misled.

Criteria for determining the materiality:

Size approach: Material information to be disclosed depends on information

affects on financial statement. That is information effect must be more than

10% on financial statement.

Change criterion approach: material information to be disclosed depends on

the circumstances. It also depends on the judgment of the accountant.

Change criterion approach is best, because information to be disclosed

depends on the circumstances and judgment of accountants rather than how

much its affects on financial statement.

Uniformity and flexibility principle:

1. Uniformity principle: the uniformity principle refers to the use of the same

accounting procedures by different firms. The desired objective is to

reducing diversity created by the use of different accounting procedures by

different firms.

2. Flexibility Principle: The flexibility uniformity principle refers to the use of

the different accounting procedures by different firms. The flexibility

principle states that an accounting information system should be able to

adapt to changes in the company based on its needs, operations, and

management.

Distinguish between uniformity and flexibility principle:

Uniformity principle Flexibility Principle

Refers to the use of the same

accounting procedures by different

firms.

Refers to the use of the different

accounting procedures by different

firms.

Reduce diversity created by the use Increase diversity created by the use

of different accounting procedures

by different firms.

of different accounting procedures by

different firms.

Accounting information system

should not be able to adapt to

changes in the company.

Accounting information system

should be able to adapt to changes in

the company based on its needs,

operations, and management.

Principle supports for uniformity and flexibility principle:

Principal supports for uniformity are that it:

a) reduces the diverse use of accounting procedures and the inadequacies of

accounting practices

b) allows meaningful comparisons of the financial statements of different firms

c) restores the confidence of users in the financial statements

d) leads to governmental intervention and the regulation of accounting

practices

Principal supports for flexibility are that:

• the use of uniform accounting procedures poses the risk of concealing

important differences among cases

• comparability is a utopian goal that ‘cannot be achieved by the adoption of

firm rules that do not take adequate account of different factual situations’

• ‘differences in circumstances’ or ‘circumstantial variables’ call for different

treatments so that corporate reporting can respond to circumstances in which

transactions and events occur