You may think that cannabis accountants sit around making up new terminology to complicate life or make ourselves look smarter. Well, it’s partially true I suppose, but we are way behind those in the tech business and social media! So what is this word materiality and why should you care? Here’s what and why.
Materiality can be described as the degree of financial importance that is assigned to a transaction or a piece of information. The more material something is, the more important it is.
Conversely, immaterial means that something is less important, of such little importance that it’s not necessary to mention it or report it.
Materiality is often expressed in numeric terms but not always. For example, the basis of accounting you choose for your business is important in understanding your financial statements. A person reading your financials needs to know what basis you have chosen for reporting. It is material to them to know.
Specific strains that you grow on your farm might not be a material item to report on your financials (although it could be, depending on your audience). If I am judging financial performance, strains are not that important to me but could be if one shows to be much more profitable than another.
Determining materiality in numeric terms is usually a little easier than determining it for a piece of information. Materiality in numbers can vary all over the board in amount. A large, publicly traded company, might have a materiality factor that is many millions of dollars. Your company, assuming you are not working with multi millions or billions (yet), is probably much lower. The point is that it is a relative measurement. Let me explain with some very simple examples.
Let’s say your sales are running $100,000 a month and you discover an error in your reporting of sales in a prior month of $3,500. Do you correct the error and restate your financials or do you make the correction in a subsequent month? $3,500 is 3.5% of the average monthly sales, a fairly small percentage. Most accountants would consider this amount immaterial and financials would not be restated. The error would just be corrected in the month the error was found. Now, what if the error was $17,000? The percentage error is 17%, do you restate for that? My answer is yes, $17,000 is a material amount and you would probably want to restate your financials.
Materiality is a judgement call. In some situations, $3,500 is important enough to restate the financials. Maybe it means the difference between a positive net profit for the month and a negative one, and investors are watching your performance. It’s not wrong to make the correction, it’s your call.
The materiality factor does not mean that you shouldn’t do your best to report financial information as accurately as possible all the time. It doesn’t mean that you leave out information that is not important to you, but might be important to someone else. Don’t use materiality as an excuse for not making best efforts at keeping a clean set of books. Just know that if you do make a mistake or are trying to decide whether to report something, consider the implications and your audience.
There are hundreds of accounting terms that are useful for cannabis business owners and managers. Betcha can’t wait for future blogs…