When a small amount is still material
The qualitative factors that can make a small amount material in a client's statements, and how to recognise, measure and disclose such items.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
"It's below materiality" is one of the most reassuring phrases in a year-end file, and one of the most dangerous. It usually means an amount is small compared with profit or revenue, and so can be left out, rounded away or folded into another line. Often that is right. Sometimes the amount is small and the matter is not: a director's private holiday paid by the company, a payment to a public official, a sale to the owner's brother at half price, an adjustment that turns a loss into a profit.
Readers of the statements care about those matters regardless of size. This article covers why materiality cannot be reduced to a percentage, the qualitative factors that most often arise in owner-managed companies in South Africa, Nigeria and Kenya, and how to treat and describe such items.
Why materiality is more than a percentage
IFAC's article "Making Sense of Materiality" explains that the accounting concept of materiality means only information that is important to investors needs to be included in the financial statements, and that information about trivial matters can be excluded. It then makes the point this article rests on: when making materiality judgements, companies need to consider both quantitative factors, such as how big the amount is, and qualitative factors, such as the specific circumstances of the company.
The same article summarises the assessment step in IFRS Practice Statement 2's process: information is material if an investor could reasonably be expected to be influenced by it when making investment decisions. For a private company the "investor" might be a bank, a minority shareholder, a buyer, or a regulator reading the statements for a licence. The question is whether that reader would think differently about the company if they knew. Size is one reason they might. It is not the only one.
Qualitative factors in practice: related parties, director dealings, covenant headroom
The factors that most often make small amounts material in owner-managed companies are:
- Related party dealings. Sales, purchases, loans or free use of assets between the company and its directors, shareholders or their families. A reader assessing whether the company's results are arm's length needs to know these exist.
- Director dealings in particular. Personal expenses paid by the company, loans to directors, assets transferred to them. These go to the heart of stewardship, which is often what minority shareholders and lenders most want to judge.
- Covenant headroom. Where a lender's covenant is close to its limit, a small adjustment can decide whether the company is in breach. The amount needed to make a difference is set by the headroom, not by profit.
- Changes in direction. An adjustment that turns a profit into a loss, or reverses a trend, changes the story the statements tell.
- Illegal acts and regulatory matters. A small fine, an unpaid tax penalty or an irregular payment can matter because of what it suggests about the business.
- Segment or product significance. An amount small for the company as a whole may be large for a line of business the owners are about to sell or close.
None of these needs a figure to be material. Each needs the preparer to know the client.
Materiality applies to recognition and measurement, not only disclosure
It is tempting to treat qualitative materiality as a disclosure question: add a sentence to the notes and move on. IFAC's article makes a broader point. It states that the concept of materiality is pervasive and applies not only to presentation and disclosure but also to decisions about recognition and measurement.
So a small item that is qualitatively material should be recorded correctly, not just mentioned. A director's personal expense paid by the company should not sit in "general expenses"; it is a receivable from the director or part of their remuneration, depending on the facts. A sale to a related party at a reduced price should be recorded at what was actually agreed, with the arrangement disclosed. Leaving a qualitatively material error uncorrected because "the amount is small" gets the reasoning backwards.
Writing the note when the amount is small but the matter is not
Notes on small but material matters should be plain and specific. Readers are not helped by a vague sentence that hints at something without saying it.
- Name the relationship: "a company controlled by the managing director", not "a related entity".
- State what happened: "the company paid personal travel costs on behalf of a director, which the director repaid after year end".
- Give the amount, even if small. Its smallness may itself be reassuring.
- Say whether anything is outstanding at year end and on what terms.
Related party notes in particular are covered in related party disclosures, and the full four-step process for materiality judgements in making materiality judgements as a preparer.
Checking AI-drafted wording against the facts the client gave
Achekam's Studio includes standard accounting policy wording based on IFRS for SMEs, labelled for review before issue, and notes take their figures from the mapped trial balance. Facts the trial balance does not hold, which includes most qualitative matters, are left as "[to be completed]". That marker is useful: it shows where a person must supply the facts.
Where an AI key is set up, AI can draft narrative text such as note wording, with figures still coming from code. Such text is labelled "AI draft - review before issue". There is no separate accept step for each paragraph; the safeguard is the firm's review stages and the partner's signature. For qualitatively material matters, read the draft against what the client actually told you, in writing. An AI draft can describe a related party arrangement in smooth, general language that understates it, or attribute it to the wrong person. The reviewer should be able to match every sentence in the note to a document or confirmation on file.
IFAC's article on making sense of materiality explains the concept, why it is hard to apply in practice, and how Practice Statement 2 helps companies decide what to include. Add one question to every client's year-end questionnaire: is there anything, however small, that you would not want a lender or shareholder to find out about later?
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
