The Materiality Concept In Coca-Cola Amatil Limited 2015 Essay Report.

Materiality Concept

Describe "The concept of materiality as applied in coca-cola amatil 2015 report". 

This study is mainly objected on the concept of materiality. Materiality is explained in this study and it is also examined how this concept transforms in the case study. Materiality is always an aspect of accounting where all matters that are considered to be important disclosed in a financial statement while those that are not considered important are not included in the financial statement. Materiality concept is applicable in many fields in the economy. It is applicable in governmental auditing, security regulations and many other fields.

This case study is based on Coca-Cola Amatil Limited Annual Report for the year 2015. The implication of the concept of materiality is examined in this report and conclusions have been summarized. The annual report for 2015 (Coca-Cola Amatil Limited) is carefully studied to establish the application of materiality concept.

The study is also focused on viewing the problems that are often associated with the concept of materiality.  This evaluation on the materiality concept was done basing the standards and frameworks of AASB / IASB. AASB /IASB standards and frameworks tend to evaluate the omissions that are there in the financial statement to make the financial statement appear tricky to use or prepare and difficult to read.

The whole study is summarized in brief making deductive sentiments from the observations made in the concept of materiality as a whole. A number of deductions have been made in this study regarding materiality. Materiality is viewed at different perspectives and all these are given a brief summary. 

The Concept of Materiality as Applied in Coca-Cola Amatil Limited 2015 Report

Whenever the term materiality is mentioned, people always think of some information that is being omitted or left out in the financial statement.  Coca-Cola Amatil Limited, just like any other private or public entity in Australia, is required to unleash their financial reports after a given time period usually at least once in a year. The government of Australian Government has developed a body that sets the accounting standards that are usually applicable when financial documents are being prepared e.g. when preparing a financial statement. The body was formed in 1991 and it was abbreviated AASB (Australian Accounting Standards Board). The Australian Accounting Standards Board helps in representing the Australian Society when using a conceptual framework to formulate international standards regarding accounting (Mio, & Fasan, 2013, p.123)

Example on Nature

International Accounting Standards Board (IASB) was formed in 2001 to help in formulating standards of accounting and financial reporting standards. The body IASB is operational and it is administered by International Financial Reporting Standards (IFRS).

A well composed financial report gives a summary of the financial conditions and the various cash flows that summarize the transactions that took place within the organization after a period of time, say one year. From these financial conditions and cash flows, the organization can be able to determine the sustainability or the profitability of a company.  Thus, the financial reports are always prepared based on the International Standards of accounting.

Coca-Cola Amatil Limited is one of the most successful bottlers of non-alcoholic beverages that are ready to drink in Asia-Pacific; it is among the world’s best five major Coca-Cola bottlers. The bottling of Coca- Cola products initially began in 1901 in the US.  This study, therefore, focuses on their report unleashed in 2015 as the case study. Coca-Cola Amatil is located in New Zealand, Australia, Indonesia, Papua New Guinea, Fiji, and Samoa. 

Materiality is a principle in accounting that unleashes that all matters considered trivial are to b ignored or disregarded, while those matters considered crucial and important are to be disclosed when making a financial statement. Financial information is always considered to be material if its disclosure can actually affect the opinion of an individual or group of individuals intending to use the financial statement, for example, investors.

However, not that information that is material to one company may be material to another. Materiality concept is much dependent on the nature and size of the organization that is preparing such financial statements.

If a company is making plans to base its operations in some geographical segment in which in the past has been a great source of revenue to the company, then the information should be accounted for or disclosed in the company’s financial statement as it is material by its nature for the future operations of this company.

A default customer of Coca-Cola Amatil Limited owed $2000 to the company in 2015. Coca-Cola Amatil Limited has net assets of worth $56million, the information of the customer owing the company is therefore considered immaterial. However, if the amount was around $45million, the information would have been considered material to the company’ financial statement since its omission would make the users of the financial statement to make wrong decisions and conclusions.

Example on Size

Different terms are often usually applied to identify the likelihood implication in materiality guidance.  The consideration of accountants often depend on a number of quantitative and qualitative aspects which may include; type of the organization, its size, aggregate base etc. Materiality is a matter of disclosure and thus, the accountants of a given company have to consider all the transactions and events and try to figure out whether the information is important to be disclosed or trivial to be disregarded.

It is a provision of Corporations Act 2001 that, a financial statement that is unleashed by a company should be “true and fair”. Actually, the information that is presented in the financial report needs not to contain misstatements or omissions of materials that are considered material to the company as this would make the users such as auditors and investors make wrong decisions and conclusions on the company’s performance.

An example is the Coca-Cola Amatil Limited unleashes all those information that are considered material to the company and to the users of such financial report. Coca-Cola Amatil Limited provides their consolidated balance sheet; the information on the balance sheet can be used by the investors to decide on whether to invest in Coca-Cola Amatil Limited or not (Hess, 2014, p.67).

The Australian Accounting Standards Board (AASB) requires that financial statements for a particular company should disclose all the material information. AASB 1031 (paragraph 8) materiality standard identifies that consideration should be made regarding materiality as this is useful to various financial statement users. In this case, the standard guides the organization on the reasonable error of omission that may be tolerated and the extent of disclosure. AASB 1031 (2004) paragraph 15 outlines the procedure for determining the materiality of a given amount that is; it is calculated based on a particular base figure. The procedure is as follows; the base figure is determined, the amount whose materiality is to be established is calculated as the base figure. If the percentage is equal to or greater than 10% of the base figure, the amount is considered to be material. On the other hand, if the percentage is equal to or less than 5%, the amount in question will be concluded as immaterial. For instance, taking Coca-Cola Amatil Limited 2015 Annual Report total revenue ($ 5,093M) as the base revenue, the materiality amount of any item in the organization will be determined by comparing the cost of the item to the base figure (revenue). A value that is between 5% and 10% will need the judgment of the account to whether it is material or immaterial. In this case, to determine whether the revenue ($16.8M) is material, the following procedure is followed:

Revenue	Reserves	Interest/Revenue
$5,093.6M	$16.8M	0.33%

From the above, it can be evident that the omission of the borrowings from banks in the financial report will not affect the economic decisions to be made by the Coca-Cola Amatil Limited 2015 Annual Report financial statement users since revenue is an immaterial item for Coca-Cola Amatil Limited.

Materiality just as any other concept applicable in financial accounting is usually associated with some challenges and problems. There are always mixed views on whether IASB is the appropriate body to continue providing additional guidance on materiality. Some are in the view that the behavioral change is required amongst auditors, regulators and those who prepare such statements. They claim their behaviors are under the influence of operational and legal constraints that are outside IASB influence. Due to these reasons, a claim has always been there that IASB is not an appropriate body to undertake further work in materiality.

In AASB 101 standards, paragraph 7 of the same states that the materiality of an item may vary greatly depends on several factors which may include the size and nature of the omission or misstatement in the financial statement. The variance in materiality may be often associated with some problems or challenges. These challenges may include;

In order to decide on the materiality of information, it is upon the auditors to put into consideration a number of factors before they finally decide. At times, information that may be considered material by one auditor may not be the same case to another auditor due to different levels of experience. Thus, decision making on the materiality of an item is always a difficult task that needs critical thinking.

The information that the Coca-Cola Amatil Limited auditor may think of to be material may not be of help at some point to the investors and users of the financial statement thus, it is a challenging task to decide on the materiality of an item.

2. Quantitative Reference Points

The existing standards actually, do not provide quantitative reference points on materiality concept. When organizations are provided with such references, it is always organizations make adjustments in their financial report basing on the materiality concept (Legoria, Melendrez, & Reynolds, 2013, p.312). Materiality owes its basing on professional judgment and experience of the accountants and auditors which are dependent on quantitative and qualitative measurement aggregate base and size. Materiality will be relative depending on the business entity in that an item may be material in one company and the same item may be immaterial in a different company. This is a clear indication that there is no clear guideline on the materiality aspect. 

The use of particular and appropriate level of judgment when materiality concept is being applied in financial statements has been a problem. This often leads to firms and entities disclosing everything that IFRS specifies regardless of the materiality level and its understandability. The response of such entities is always to avoid arguments and debates that may arise among auditors, users, regulators etc. They, therefore, unleash the information required by IFRS without checking on the materiality. 

Some language used to describe disclosure on materiality may be difficult to understand. This may imply that some items will have to be disclosed in all situations.  In some circumstances, analysts tend to complain that some information that may be useful for economic decisions is missing. This is because such information is not specified in the standards (even though standards clarify entities and firms need to disclose additional information that may be necessary to achieve the objectives a basic financial report). There is, therefore, problem of unclear language between the recipient and the developers of the standards (Schlesinger, Libby, & Geiszler, 2013, p.231)

It can, therefore, be concluded that the issue of materiality is not well handled with the existing IASB / AASB standards and frameworks as it tends to primarily base its judgment on company’s financial auditor. However, International Accounting Standards Board is in the process of dealing with such problem. IASB is in due process of introducing more standards that will help to guide the professionals on how to deal with the materiality concept.

A project on materiality needs to take into account the cause of inability, difficulty, or reluctance to use judgment. The project ought to allow dialogue on materiality amongst the parties in financial reporting channel. Despite IASB/AASB viewing the concept of materiality as being clearly described in the conceptual framework, it is evident the term materiality is being used to mean different things for different circumstances or purposes.

A material item is a substance, item or information that may be considered to be of benefit to the users of a financial report of a company. When unleashing a financial report, all the material items are included in the report while the immaterial items are omitted. However, at times misstatement may occur to such statements.

Misstatements usually arise as a result of fraud or errors made by the auditors. These misstatements can be classified into two types;

Here, the misstatement arises as a result of Coca-Cola Amatil Limited’s auditor making an incorrect selection or misapplying accounting principles. This may also include overlooking or interpretation of data. Known misstatements comprise of misstatements of facts and misstatements involving subjective decision (Anderson, Doxey, Geiger, Janvrin, & Polinski, 2016, p.63).

The auditor of Coca-Cola Amatil Limited may differ in judgments regarding financial accounting, especially where estimation was to be done and the auditor considers unreasonable or inappropriate approximations. The type of misstatement described by the above statement is a likely misstatement.

There are some obvious causes of misstatements. These causes may include;

• Inaccuracy in data collection or gathering.
• Omission of an amount or information whose disclosure is required
• Differences in amount, grouping or description of the financial statement.

Materiality concept is important for all decision-making processes and it is essential to understand and apply the General Accepted Accounting Principles (GAAP).  In order to measure the level of materiality of item or information, a contextual qualitative and quantitative analysis is always done to such provisions. For instance, Coca-Cola Amatil Limited is a big Company with a revenue base of $5093.6M. In this case, if a particular item in one of the stores costing $10M is damaged it will be immaterial to the company as this represents just 0.1963%. However, if the organization had revenue of $40,400 this will be material to the firm as it will represent a significant figure in their operations (Carlile, Nicolini, Langley, & Tsoukas, 2013, p.434).

Materiality is determined without regarding the degree of inherent uncertainty that is involved in measuring different aspects.  This concept is usually applicable in two steps;

1. Strategy – This involves setting on how to carry out a detailed materiality test. Preliminary materiality is acquired and divided into portions. These portions or segments are known as audit segments.
2. Assessment – Here, the results are investigated. Total value errors are identified in each edit segment of the preliminary materiality. Comparisons are then made of the total value of error with the level of preliminary materiality.

For auditors to effectively decide about the materiality of an item they will need to undertake the following;

• Document the initial materiality decisions.
• Understand and test internal controls that are unique to specific opinion units
• Accumulate different uncorrected misstatements
• Check the adequacy of the note disclosures
• Test the budgetary comparison.

When carrying out materiality analysis or evaluation a number of factors need to be considered. Some factors that may be considered are;

The relevant economical, social, environmental surroundings have to be considered by the auditors when establishing the materiality of information or item. This will help to know how valuable the information or the item is (Kuznetsov, 2015, p.34).

The company needs to obtain how valuable an item or information to be considered is to Coca-Cola Amatil Company. The rank of such information will be evaluated and will be considered valuable if it is of higher rank.

The issues that have been obtained by Coca-Cola Amatil Company need to be presented in order of priority, with those that are more important being given more priority. This will help the Company to exactly that information that is basically important to include in their annual financial reports. 

In Coca-Cola Amatil Company, materiality establishment involves phases of planning the financial audit being a very important phase of engagement.

When the preliminary materiality at a lower level than necessary is determined, the risk that within the financial audit engagement to be effectuated an additional activity of audit collecting evidence is determined (Eilifsen, & Messier Jr, 2013, p.234).

When the materiality establishment is at a higher level than it should actually be imposed, then it implies that the risk of not identifying some significant errors is determined.

The following steps are followed in determination of materiality of information or item;

• In the planning stages, preliminary materiality is divided into level accounts or individual transactions. This helps to determine the materiality of the account or that of an individual transaction.
• The division procedures of the materiality are chosen based on the professional auditor’s reasoning.
• The results are then monitored on the preliminary materiality

Between the materiality, and the level of the audit risk, there is always an inverse proportion report. That is, a higher material level implies a smaller audit risk and vice-versa. 

The estimated value of errors can be calculated as (Carey, Potter, & Tanewski, 2014, p.108);

Estimated value of errors = Errors discovered in the sample x Total value of the analyzed 

Total Value of the Sample amount (of the audited account)

However, these audit risks can be diminished. In order to achieve this, the auditors and financial statement preparers tend to;

• Reduce the risk of external non-detection by modification of the background control.
• Attenuation of evaluated risk by making an erroneous presentation. Here, some extended test controls are carried out.

Relationship of the Materiality Employed in Coca-Cola Amatil Limited Annual Report for 2015

Materiality has been employed in the preparation of the Coca-Cola Amatil Limited 2015 Annual Report. Non-material items that would rather make the whole document appear difficult to prepare and bulky to analyze are omitted and only the inclusion of material items is done.

The basis of the preparation of 2015 Annual Report for Coca-Cola Limited is as listed below;

• It has been prepared in accordance with Australian Accounting Standards and other pronouncements of the Australian Accounting Standards Board (AASB) and the Corporations Act 2001.
• The financial report has been prepared on the basis of historical cost except for a few financial assets and liabilities measured at a fair value.
• The report is outsourced and released as per the Financial Reporting Standards, as issued by International Accounting Standards Board.

In context with AASB provisions on materiality, a number of aspects have been deployed in the 2015 Annual Report for Coca-Cola Amatil Limited. Some of the aspects employed include;

It is a provision of AASB that material items of different types be presented differently in the financial statement. The categories are based on the nature of such material items. This is employed in Coca-Cola Amatil Limited Annual Report for the year 2015. For example, in the statement, there is a section named Additional Statutory Disclosures (Pg. 68).

It is a provision of AASB that a financial statement is presented yearly. Actually, the financial report for Coca-Cola Amatil Limited is a report capturing 2015 financial year. This actually, means that at least a financial report is subject to provision at least once in a financial year by Coca-Cola Amatil Limited. 

Conclusion

The study basically revolves around materiality. This is actually an important aspect of the financial institutions or organizations in making of standard financial statements. The concept is greatly deployed in the 2015 Annual Report for Coca-Cola Amatil Limited.

Despite the existence of ample statistical methods that can be used to carefully in accounting for decision making, most accountants still tend to use qualitative methods that can be used in their routine practices based on their judgments on these accounting practices. They rarely attempt to make innovative processes applied to materiality. This calls for a recommendation of application of non-traditional methods by auditors, accountants and organizations to actually embrace technology and also use such ample methods as materiality.

Materiality is essential when executing an approved audit plan’s provision and helps in making conclusions of a financial audit. 

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