Accounting

What is materiality? The AICPA definition of materiality changes

10 min read
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The Auditing Standards Board (ASB) is the AICPA's senior committee for auditing, attestation and quality control applicable to the performance and issuance of audit and attestation reports for non issuers. The board develops and updates standards to ensure high-quality and objective auditing.

In December 2019, the Auditing Standards Board issued Statement on Auditing Standards No. 138, Amendments to the Description of the Concept of Materiality (SAS 138), which amends the definition of materiality. SAS 138 is effective for audits of financial statements for periods ending on or after December 15, 2020. This effective date coincides with other significant new audit standards, such as the change in the form and content of audit reports of nonpublic entities.

Define materiality

What is materiality, and how does this term apply to auditing and attestation in the accounting industry? The materiality definition in accounting refers to the relative size of an amount. Professional accountants determine materiality by deciding whether a value is material or immaterial in financial reports. Materiality is an essential understanding for accurate and ethical accounting, so its definition should be strongly considered. There are varying definitions of materiality, depending on the standards board. The Financial Accounting Standards Board (FASB) is an independent organization that establishes accounting standards, and their standards may differ from the AICPA's ASB.  

AICPA definition of materiality

In August 2018, the Financial Accounting Standards Board (FASB) amended how they define materiality to be more consistent with the United States judicial system, the Public Company Oversight Board (PCAOB), and the Securities Exchange Commission (SEC). Yet, the ASB continued to maintain a definition of materiality that was converged with the one used by the International Accounting Standards Board (IASB).

The old definition in the ASB's Statement on Auditing Standards is:

Misstatements, including omissions, are considered to be material if they individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users on the basis of the financial statements.

Now, the definition of materiality used in all financial statement audits in the United States will be converged with relevant U.S. standard-setting, regulatory, and judicial bodies.

The new definition in the ASB's Statement on Auditing Standards is:

Misstatements, including omissions, are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

The foundation of the new materiality definition lies in the 1976 U.S. Supreme Court decision TSC Industries, Inc. v. Northway, Inc. which opined that an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would(not could) consider it important in deciding how to vote.

Learn more about the PCAOB's auditing standards in Becker's CPE courses: PCAOB Audit Standards Part 1, Part 2 and Part 3.

Jennifer Louis, CPA, has more than 25 years of experience in designing high-quality training programs in a variety of technical and "soft-skills" topics necessary for professional and organizational success. In 2003, she founded Emergent Solutions Group, LLC, where she focuses on designing and delivering practical and engaging accounting and auditing training. Jennifer started her career in audit for Deloitte & Touche. She graduated summa cum laude from Marymount University with a B.B.A. in Accounting.

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