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According to the lower end threshold for prudence , how can be able to calculate wether or not an event is material or not ?
I have example from kaplan but I do not understand how they arrive at the percentages to determine materiality .
FS. extract 31/12/2004 & 31/12/2013
Revenue $21,960M $19,580mTotal asset $9,697m $7,288
Pbt. $1,048m $248
A major customer of the client was placed into administration owing $211,000.
Answer from the book say
Since it’s an adjusting event and to determine its materiality , the total figure is $211,000 which 1% of revenue , 2% of total assets and 20% of profit and there is material .Please , how do they arrive at those percentage figures ?
Thanks in advance .
The accepted ranges you have to learn for materiality are
0.5m-1% revenue
1 – 2 % total assets
5-10% operating profit.The calculations in the answer seem to be a million incorrect For example, 1% revenue is 219.6m. Have you copied the question correctly?
Yes , correctly sir … Revenue $21,960,000 for the current period while the prior period is $19,580,000
I just need the technique to use so I can use it to do the rest questions !
Thank you in advanceBut you wrote 21,960m. That is not 21,960,000!
An error of 211,000 is 100×211,000/21960,000 = 0.96 ie more or less 1%. Materiality range for revenue 0.5 to 1% so this is material wrt revenue.
211,000/ 1,048,000 (I assume that is the orofit, not what yiu wrote) is 20% of profit, well above the 5 to 10% range.
211,000/ 9,697,000 is 2.2%, above 1 to 2% range for net assets.
If the error is within or above fhe ranges, the error is material.
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