Materiality in Disclosure

The principle is based on that 

• the P & L A/c should be so drawn up as to give a true and fair picture of the figure of profit earned or loss suffered during the year; and 
• the BS should give on its date a true and fair picture of the financial position of the company. 

Both statements must give sufficient analysis of figures, without unnecessary detail, to enable a person studying them to have knowledge about all the significant factors which have led to the figure or to the financial position. The real test is one of materiality : like, if a figure is material, it has to be disclosed. A 

figure is material by itself in the sense that, if it is merged with other figures, it will cloud the vision or the perspective. An example is : if arrears of salaries/wages, due since long either because of a dispute or because of pay revision, are added to current year's salaries and wages (even when the former are large amounts), a wrong idea of the salaries/wages of the [individual(s) as well as of the] company gets conveyed. The arrears should, therefore, be shown separately. However, if the arrears are relatively quite small, it may not be improper (note : it is not yet said to be "proper") to merge the two series of salaries/wages. Also, materiality may again arise when there may be a departure from the previous year's  practice or some serious lapse. A penalty or a fine imposed on a firm for, say, mismanagement of the environment, is a material information to be separately shown. Judgement of the preparing individuals is the only guide and there are no hard and fast rules set up, except to say that evaluations and decisions should not be let to suffer. 

A convention of SUBSTANCE OVER FORM is also mentioned in this context. Transactions and other events should be accounted for and presented in accordance with their substance and reality and not merely with their legal form.