November 27, 2012
Materiality brings up the question of how the omission or misstatement of information in a company’s financial statements impacts the actions of its users. If financial statement users would have been expected to alter their actions or decisions if the info had not been omitted or misstated then the items omitted or misstated are considered to be material. If the financial statement user(s) would not have been expected to change their actions, then it is considered immaterial. (Accounting Tools, 2012) Based on the SAB99 the financial user is a reasonable person and a matter is material if the reasonable person finds it important.
In the case of Polymedica, the reasonable persons were: Short-Sellers and the Securities Exchange Commission, whose purpose is to protect investors (short-sellers) from illegal financial practices by making sure that companies that offer securities to the public provide accurate financial information. The reasonable persons felt that using the capitalization method was material. Due to size of its effect on the income statement, it is an example of quantitative materiality.
In the case of Baush & Lomb, the company decided to force their vendors to take the company’s unwanted merchandise and threatened to not work with them if they didn’t do it. This would be considered qualitative materiality which could be useful information to certain reasonable persons because it could have caused a significant loss in customers who could then lead to a loss in future profits.
In the case of Merrimeck Tractors, Inc. LIFO or FIFO the question was whether or not they should change accounting practices due to…