Financial items to which the accounting standards apply
- The Accounting Standards are intended to apply only to items, which are material.
- An item is considered material, if its omission or misstatement is likely to affect economic decision of the user. Materiality is not necessarily a function of size; it is the information content i.e. the financial item which is important.
- A penalty of ` 50,000 paid for breach of law by a company can seem to be a relatively small amount for a company incurring crores of rupees in a year, yet is a material item because of the information it conveys.
- The materiality should therefore be judged on case-to-case basis. If an item is material, it should be shown separately instead of clubbing it with other items.
- For example, it is not appropriate to club the penalties paid with legal charges.
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