Small errors: assess materiality individually, together and by nature
Three errors turn up in the week before the accounts are approved: inventory overstated by £12,000, a £9,000 supplier charge for work already received left out, and depreciation £4,000 too low because of a spreadsheet formula. None looks large alone, and each might pass a per-entry threshold. All three push profit the same way, by £25,000 together. Under IAS 1 as adopted in the UK, materiality depends on the nature or size of information, or both, judged individually and alongside other information in the context of the financial statements as a whole. A per-entry cutoff cannot make that judgement.
Nature, size and the whole picture
IAS 1 says materiality depends on the nature or magnitude of information, or both. An entity assesses whether information is material on its own and in combination with other information, in the context of its financial statements as a whole (IAS 1, paragraph 7). The standard also warns against obscuring material information with immaterial detail or with inappropriate aggregation (paragraphs 29 to 31). That cuts both ways. Not every small item needs separate presentation, and a long list can hide the item that matters.
IFRS Practice Statement 2 gives non-mandatory guidance on making these judgements and does not prescribe a universal monetary cutoff (paragraphs IN6, 1, 3 to 4 and 40 to 55). On errors, it says they are assessed individually and collectively. A material error cannot be left uncorrected because another error has the opposite effect, and errors that were immaterial when they arose can accumulate and become material through changed circumstances or further current-period errors (paragraphs 72 to 80).
Three hypothetical errors
This example is hypothetical, in pounds. Draft profit before tax is £100,000. All three items are errors, not revisions of estimates, each fully affects this year's profit, and there are no tax effects or offsets. No materiality conclusion is assumed.
Corrected profit is £100,000 less £25,000, or £75,000. The £25,000 is 25% of draft profit. That ratio is context for the judgement, not an IFRS materiality percentage and not an automatic answer. Materiality is entity-specific, so the same £4,000 depreciation error could matter in one business and not in another.
Nature can matter regardless of size. A small related-party transaction, or an error that affects compliance with a requirement, needs assessment because of what it is, though that does not make every such item material. A small error made deliberately to achieve a particular presentation is not excused by a low-value policy (IAS 8, paragraph 41).
| Hypothetical identified error | Profit overstatement |
|---|---|
| Inventory valuation overstated | £12,000 |
| Supplier work received but expense omitted | £9,000 |
| Depreciation understated by spreadsheet error | £4,000 |
| Total profit overstatement | £25,000 |
Offsets and old errors
Suppose a fourth hypothetical error understated profit by £12,000. The net effect on profit would fall to £13,000, but that does not settle anything. If the £12,000 inventory error is material on its own, the offset does not excuse it. The same applies to errors that leave profit unchanged. A misclassification between lines, or a missing disclosure, can be material when the profit total does not move at all.
Errors carried from earlier years belong in the same assessment. A balance left uncorrected last year because it was small can combine with this year's errors. Where a material prior-period error is identified, IAS 8's correction requirements apply.
Auditors use the same framing. The auditor's report in the Government Property Agency's 2025/26 accounts explains materiality by reference to misstatements, individually or in aggregate, that could influence users' economic decisions. That is an audit explanation, not a numerical limit for management or for another entity.
An uncorrected error schedule
We suggest a schedule of every identified error not yet corrected, showing the account affected, the reporting period, the direction, the cause and the proposed correction. Assess each one alone first. Then total the effects on each line item, on subtotals such as gross profit or operating profit, on disclosures and on the financial statements as a whole. Review qualitative factors, related information and errors carried from earlier periods. Do not let a net profit figure stand in for the line-by-line review. Record why each item is corrected or left, and who approved that decision.
Before approval
Correct the errors that are material individually or together, and attach the schedule, with the reasoning for anything left uncorrected, to the approval file.