Financial statements are focused primarily on the needs of external users, primarily creditors and shareholders. They use materiality considerations to decide how particular items of information should be recorded and disclosed. To provide information to these users, accountants also make cost-benefit judgments. For example, if the costs associated with financial information preparation are too high or if an amount is not sufficiently large or important, a business might implement a materiality policy for various types of asset purchases to guide how such costs are to be recorded. For example, a business might have a materiality policy for the purchase of office equipment whereby anything costing $100 or less is expensed immediately instead of recorded as an asset. In this type of situation, purchases of $100 or less are recorded as an expense instead of an asset to avoid the time and effort needed to record depreciation expense each year for small amounts. This small violation of GAAP will not impact decisions made by external users of the business’s financial statements.
Accountants must also make decisions based on whether information is useful. Is it comparable to prior periods? Is it verifiable? Is it presented with clarity and conciseness to make it understandable? Readers’ perception of the usefulness of accounting information is determined by how well those who prepare financial statements address these qualitative considerations.
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