Under FRS 102, information is material if leaving it out, getting it wrong or burying it could reasonably be expected to influence the decisions of people who use the accounts. The directors judge this for their own company, looking at both the size and the nature of each item in the context of the accounts as a whole. Paragraph 3.16B then allows a specific disclosure to be left out if the information it would give is not material, even where the standard lists it as a minimum requirement, unless the Companies Act requires it regardless.
Tax investigation insurance from £108.75 a year (£9.06 a month).Pays up to £100,000 of your accountant's fees if HMRC opens an enquiry. No excess. Buy online in a few minutes.
What does material mean in FRS 102?
Paragraph 2.11 of FRS 102 says information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the users of general purpose financial statements make on the basis of those statements. Paragraph 2.12 calls materiality an entity specific aspect of relevance that depends on the nature or magnitude of information, or both, assessed individually or in combination with other information, in the context of the financial statements taken as a whole.
Paragraph 2.13 explains the third word, obscuring. Information is obscured if it is communicated in a way that has a similar effect to leaving it out or misstating it. The examples given are vague or unclear language, aggregating dissimilar items or splitting similar ones, and hiding material information among immaterial information. So materiality cuts both ways: it permits leaving things out, and it also counts against cluttering the accounts with detail that drowns the points readers need.
These definitions apply from accounting periods beginning on or after 1 January 2026, when the Periodic Review 2024 amendments to FRS 102 took effect (paragraph 1.37).
Who makes the judgement, and is there a percentage rule?
The directors. Section 393 of the Companies Act 2006 says directors must not approve accounts unless they are satisfied they give a true and fair view, and every decision to include, omit or combine information feeds into that. An accountant who prepares the accounts proposes the judgements, but the board owns them.
FRS 102 gives no percentage threshold. That is deliberate: a misstatement of a set size might not concern anyone in one company and be decisive in another. Auditors do set numerical materiality using benchmarks under ISA (UK) 320, explained in our page on materiality in an audit, but that figure is a tool for planning audit work. It does not decide what the directors must disclose, and many small companies have no audit at all.
For a structured approach, the IASB’s Practice Statement 2, Making Materiality Judgements, sets out a four step process. It is written for IFRS reporters and the IFRS Foundation describes it as non mandatory, but its reasoning fits the FRS 102 definition, which uses the same wording.
Worried about an HMRC check? Tax investigation insurance pays your accountant’s fees if HMRC opens an enquiry or compliance check. Solar Protect cover pays up to £100,000 with no excess. It never pays tax, interest or penalties.
From £108.75 a year (£9.06 a month) for individuals, £117.57 for sole traders and £207.50 for companies and partnerships, including IPT and the £20 admin fee.
See my price in 2 questions or call 01795 841 310.
★★★★★ Rated 4.9 out of 5 on Trustpilot from over 160 reviews
How do size and nature each come into it?
Size is the obvious test: an item that would change a reader’s view of profit, net assets or a key balance is material. But nature can make a small amount material on its own. Typical examples are dealings with directors and other related parties, a breach of a loan covenant, a transaction that turns a profit into a loss or a small surplus of net assets into a deficit, and anything bearing on whether the company can carry on as a going concern.
FRS 102 makes the same point about accounting policies. Paragraph 8.5A says policy information about immaterial transactions is generally immaterial and need not be disclosed, but may be material because of the nature of the transactions even if the amounts are not. Paragraph 8.5B lists situations where policy information is expected to be material, including a policy changed in the period with a material effect, a policy chosen from options in the standard, and an area involving significant judgements or assumptions.
When can a note be left out?
Paragraph 3.16B is the key rule. An entity need not provide a specific disclosure required by FRS 102 if the information resulting from it is not material, and this applies even where the standard sets out a list of specific requirements or describes them as minimum requirements. Paragraph 1A.17A applies the same rule to small entities using Section 1A, including the disclosures in Appendix C, except when required by the Act regardless of materiality.
The exception needs care. Footnote 34 to paragraph 3.16B says certain disclosures required by the Act must be given regardless of materiality, and gives information about subsidiary undertakings as an example. So before cutting a note, check whether it comes from the standard alone or reproduces a Companies Act requirement. Section 1A marks the paragraphs that reproduce company law with a reference to the relevant paragraph of Schedule 1 or the Act, which makes this easier. Our pages on notes required in small company accounts and Section 1A for small entities list what is typically needed.
Going the other way, paragraph 1A.17 warns that a small entity may need disclosures beyond Appendix C that are relevant to material transactions in order to give a true and fair view. Materiality is a reason to add notes as well as to remove them.
How does materiality affect the face of the accounts?
Paragraph 3.15 requires each material class of similar items to be presented separately, and items of dissimilar nature or function to be shown separately unless they are immaterial. Paragraph 3.16 says a line item that is not individually material is aggregated with other items, either on the face of the statements or in the notes. Paragraph 3.16A adds that an entity must not reduce understandability by obscuring material information with immaterial information or by combining material items of different natures.
Company law allows the same flexibility within the statutory formats. Paragraph 4(2) of Schedule 1 to SI 2008/409 lets directors combine items given Arabic numbers in the formats where their individual amounts are not material to assessing the company’s state of affairs or profit, or where combining helps that assessment; in the second case paragraph 4(3) requires the individual amounts to be disclosed in a note. Separately, paragraph 5.9A of FRS 102 requires the nature and amount of material items of income and expense to be disclosed separately.
Does materiality apply to recognition and measurement too?
Yes. Paragraph 10.3 says an entity need not follow a requirement of an FRS if the effect of doing so would not be material. This is the basis for practical policies such as expensing low value equipment rather than capitalising it, or not discounting a short term balance. The test is the effect, so a policy that is harmless for one item can become a problem as such items build up, and the cumulative effect needs reviewing.
Errors follow the same logic. Paragraph 10.21 requires a material prior period error to be corrected retrospectively by restating comparatives or opening balances, with the disclosures in paragraph 10.23. An immaterial error from a prior year can usually be corrected in the current year’s figures.
How might this work for a small company?
Illustration only. A trading company has turnover of £2 million, profit before tax of £120,000 and net assets of £400,000. In preparing its accounts the director and the accountant consider three items:
| Item | Amount | Judgement |
|---|---|---|
| Accounting policy note on foreign currency, with one small euro invoice in the year | £800 | Immaterial in size and nature; the policy note can be cut under paragraphs 3.16B and 8.5A |
| Interest free loan to the director at the year end | £6,000 | Small in size but material by nature, because readers focus on dealings with directors; disclose |
| Stock count error found from last year | £35,000 | Large against profit and net assets; material, so restate comparatives under paragraph 10.21 |
A short written note of these judgements on the accounts file shows the reasoning if the accounts are later questioned.
What mistakes come up?
- Applying a single percentage of turnover or profit and ignoring the nature of the item.
- Treating the auditor’s materiality figure as permission to leave out disclosures.
- Deleting a note that reproduces a Companies Act requirement that applies regardless of materiality.
- Keeping every boilerplate note from last year’s template, which can obscure the information that counts under paragraph 2.13.
- Looking at items one by one and missing that several small misstatements in the same direction add up to a material one.
The overall test is always the one in section 393: do the accounts, read as a whole, give a true and fair view.
Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.
Related Accountapedia entries
- Materiality in an audit
- Preparing accounts from incomplete records
- Preparing a practice for MTD Income Tax
- Preparing accounts on a basis other than going concern
- Self review threats in preparing audit clients’ accounts
Sources
- Financial Reporting Council: FRS 102 September 2024 tmKYWO6
- legislation.gov.uk: Act 2006 c. 46, section 393
- IFRS Foundation: Materiality practice statement
- legislation.gov.uk: SI 2008/409, schedule 1
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.