Financial Accounting: The Concept of Immateriality in Banking

This report delves into the concept of immateriality in financial accounting, emphasizing its role in decision-making and financial reporting. It highlights how accountants use expert judgment to determine the significance of financial information, impacting stakeholders like owners and managers. The report explains how immateriality affects accounting provisions, using examples from the banking sector to illustrate how transactions are classified and recorded. It also emphasizes the importance of considering both the size and nature of specific items when assessing immateriality. The study clarifies that immateriality is a subjective concept, influencing how companies measure and disclose transactions that could affect stakeholders' interests. The report references academic sources to support its analysis, providing a comprehensive overview of immateriality and its practical implications in finance.

Financial accounting

Immateriality accounting refers to the application of the concept of materiality. The
information of immateriality doesn’t considerably impact user’s decisions, like owners and
managerial authorities. Accountants are required to make use of expert judgment to conclude
either the amount is immaterial or not. There is a need of defining materiality level for the
financial records (Edgley, 2014). Thus, when an aggregate of inaccuracy is held in the total level
of materiality than in leads to misleading of financial records. While determining immateriality,
it is important to make consideration of the manner and size of the specific item. By considering
the manner or nature refers that if a small amount transaction is taking place abnormally it can be
material, but in case it is a daily transaction it can be immaterial. For example, at my workplace
huge amount of papers are used in banking transaction however its cost is immaterial for
business as it is used on a daily basis even for nominal work.
The concept of immateriality also affects accounting provisions as all accounting
transaction cannot have same effect irrespective of the fact that they belong to same nature of
assets. In relation to banking business both computers and calculators are considered to be an
asset and have a useful life of more than one year but computers are recorded as fixed asset and
calculator is covered the cost of stationery which is recorded as an expense due to the concept of
immateriality. It is all because of the cost associated with the assets (Hu, 2013). Recording
calculators as an expense will not affect financial statements as it has nominal costs for banks
Furthermore recording depreciation on calculators is not a sane aspect in banks as it will
unnecessarily make accounting process length and irrelevant. This concept clarified the fact that
superseding of matching concept will not have a significant impact on the financial statements
for the banking company.
In terms of accounting, professional judgment is required to determine whether the
accounting transaction or event is material or immaterial. It is because when $5,000 is assessed
as the immaterial amount for an international company but for the small bank, it can be
considered as a material amount. Consideration of materiality is not done by item’s monetary
amount; it is done by the item’s nature. Several factors inclusive of either the item is engaged in
illegal transactions, must be assessed while verifying materiality (Cameron, 2014). For example,
an amount like $.50 or $.30 is immaterial individually, but same is material for the bank as
cumulatively it becomes material amount because banks have thousands of such transactions on

a daily basis. Due to this fraud like transferring minute amount, several times to a single account
is material fraud.
Bank has to deal with various organisations as it is public body thus they are required to
provide their services accordingly. These transactions create various assets and liabilities but not
all considered to the material. At my workplace, judgement of immateriality is based on the
percent of revenue. If a transaction is within the limit of 3% of total revenue or asset, then same
is considered to be immaterial, and manipulations or other related aspects are ignored if it occurs
occasionally. Take an example of a noticeably immaterial item; there is a $100 prepaid of rent on
a post office box for six months; according to the matching principle, charging the rent as an
expense on six months is required (Acito, Burks, & Johnson, 2016). However, as the transaction
amount is so minute that the financial statements reader will not be misinformed if the entire
amount is charged as an expense to the particular period instead of scattering the same over the
usage period. In point of time, when the figures of financial statements are rounded to the nearest
thousand or million dollars, then this accounting transaction will not make any alteration the
financial statements at all.
The concept of immateriality is crucial for banking entity as it assists managerial
authorities on focusing on crucial factors which can affect the decision of rational stakeholders.
For this aspect, it is important for managers, to prioritise the strategic aspects they required to
focus (Kovács, 2015). This approach also assists in better planning and allocation of resources in
order to achieve the objective of optimum utilisation. Along with this, financial statements of
business become more viable as it is prepared by considering the significance of the day to day
transactions.
Present study clarifies the fact that immateriality is subjective concept according to which
company measure and disclosure transaction which are sufficiently material and can affect the
interest of stakeholders.

REFERENCES
Acito, A., Burks, J. J., & Johnson, W. B. (2016). The materiality of accounting errors: evidence
from SEC comment letters and implications for research proxies.
Cameron, R. (2014). Applying the Materiality Concept: The Case of Abnormal
Items. CORPORATE OWNERSHIP & CONTROL, 428.
Edgley, C. (2014). A genealogy of accounting materiality. Critical Perspectives on
Accounting, 25(3), 255-271.
Hu, M. (2013,). Pondering over the Problems of Immaterial Assets. In 2013 Conference on
Education Technology and Management Science (ICETMS 2013). Atlantis Press.
Kovács, Z. I. (2015). Immaterial Assets in the Hungarian Accounting System and Financial
Statements. Public Finance Quarterly, 2, 227.