C3.4.7.1 Materiality

 

“Requires that the Assurance Provider states whether the Reporting Organisation has included in the report the information about its sustainability performance required by its stakeholders for them to be able to make informed judgements, decisions and actions.”

Source: AA1000 Assurance Standard: 2003

 

The concept of materiality comes from financial auditing and reporting. “Materiality” is an accounting principle that states that financial reports only need to include information that will be significant (material) to their users.

Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements (IASB Framework).

Materiality therefore relates to the significance of transactions, balances and errors contained in the financial statements. Materiality defines the threshold or cutoff point after which financial information becomes relevant to the decision making needs of the users. Information contained in the financial statements must therefore be complete in all material respects in order for them to present a true and fair view of the affairs of the entity.

 

Materiality is relative to the size and particular circumstances of individual companies. For example:

  • A default by a customer who owes only £1000 to a company having net assets of worth £10 million is immaterial to the financial statements of the company. However, if the amount of default was, £2 million, the information would have been material to the financial statements omission of which could cause users to make incorrect business decisions.
  • If a company is planning to curtail its operations in a geographic segment which has traditionally been a major source of revenue for the company in the past, then this information should be disclosed in the financial statements as it is by its nature material to understanding the entity’s scope of operations in the future.
  • 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 pounds would not be material, but for a smaller company it might be.

 

In terms of CSR, materiality is considered to be the inclusion of issues and indicators in a CSR report. This will guide the breadth of content and depth of detail to ensure both clarity and relevance. Materiality can also be consider to be the threshold at which topics or indicators become sufficiently important that they should be reported.

 

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