What does the materiality principle state in GAAP?

• A. All information must be disclosed regardless of size
• B. Only material information should be disclosed
• C. Financial statements can omit irrelevant details
• D. All financial errors must be corrected

Answer: (B)

The materiality principle in GAAP emphasizes that only information that could influence the decision-making of a reasonable user of financial statements needs to be disclosed. This focuses on the concept that not all information is of equal importance, and only material information—meaning information that significantly impacts the understanding of the financial position or results of operations—should be included in the financial reports.

This principle helps streamline financial reporting by allowing companies to focus on what is significant rather than being burdened by the necessity to disclose every trivial detail, which might clutter the financial statements and obscure more important information. For example, a small expense that does not affect the overall financial picture might be considered immaterial and therefore not required to be disclosed, as it would not impact a user’s economic decisions.

In contrast, the other options suggest broader or different approaches to financial reporting that conflict with the intent of the materiality principle. Disclosing all information regardless of size would overwhelm users with data, and stating that all financial errors must be corrected does not directly address the relevance of the information to the user’s decision-making process. Omitting irrelevant details may seem similar, but it does not capture the essence of focusing specifically on material versus immaterial information, which is central to the materiality principle itself