Difference between revisions of "AAA.Materiality"

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'''Reading''': “Materiality, Concepts on Professionalism,” Discussion Paper, Professionalism Series, 2006, No. 8, June 2006.
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'''Author''': American Academy of Actuaries (AAA), Task Force on Materiality
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&nbsp;&nbsp;[https://www.battleacts6us.ca/vanillaforum6us/categories/aaa-materiality<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>]
 
&nbsp;&nbsp;[https://www.battleacts6us.ca/vanillaforum6us/categories/aaa-materiality<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>]
  
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==Pop Quiz==
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{| class='wikitable' style='background-color: navajowhite;
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|-
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|| '''BA Quick-Summary''': <span style="color: green;>'''Materiality'''</span>
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* '''Question:''' When can a discrepancy be ignored?
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* '''Answer:''' When it is 'small enough' not to matter. ''(In other words, when it's not material.)''
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This reading discusses the concept of materiality.
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|}
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==Study Tips==
  
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This is an important topic, but it's already discussed thoroughly in the ''[[COPLFR.SAO#Step_6-A:_Materiality_Standard_.28Relevant_Comments.29 | SAO (Statement of Actuarial Opinion)]]'' reading. You probably don't need to spend much time here.
  
 
==BattleTable==
 
==BattleTable==
  
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Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:
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* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''
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: {| class="wikitable" style="width: 1000px;"
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|-
 
|-
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| [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(01).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style="color: red;">'''(2017.Fall #1)'''</span>
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|| ''no prior questions''
 
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[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=AAA&suffix=Materiality&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>
  
 
==In Plain English!==
 
==In Plain English!==
  
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Alice the Actuary just accepted an actuarial job offer at a salary of $120,000. Woo-hoo!
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* But the next day, HR called and said they'd made a mistake. The salary is only $119,500. Do you think she would accept the revised offer?
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* What if the revised offer were $115,000, or $110,000, or even lower.
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:{| class='wikitable'
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|-
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| '''Question:''' How low do you think HR could go before Alice would reject the revised offer?
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|}
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Obviously this question doesn't have a single correct answer. ''(For Alice, it depends on this month's credit card bill.)''
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* Let's suppose Alice would be willing to accept $115,000, but nothing less.
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* Then the '''level of materiality''' in this situation would be $5,000. That's because any reduction <u>less than $5,000</u> '''would not''' affect her decision. But any reduction <u>more than $5,000</u> '''would''' affect her decision.
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That's the idea behind materiality:
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: ==> What is the <u>smallest</u> amount that would <u>change</u> your decision?'''</span>
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Let's elaborate, but like true actuaries, do it in as confusing a way as possible. Joke. :-)
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:{| class='wikitable'
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|-
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| '''Question''': describe the concept of materiality
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|}
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:* An ''omission'', ''understatement'' or ''overstatement'' in a work product is '''material''' if it is likely to affect either the intended principal user’s </u>decision-making</u> or the intended principal user’s </u>reasonable expectations</u>.
  
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==BattleCodes==
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{| class="wikitable"
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|-
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| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz! &nbsp;&nbsp; :-o'''
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|}
  
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Memorize:
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* Which company would likely have a <u>lower</u> materiality level regarding its <u>net income</u>?
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:: <u>Company A</u>: incorporated in 1970
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:: <u>Company B</u>: incorporated in 2016
  
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* <span style="color: red;">Click</span> ''[[Pop Quiz Materiality | here]]'' <span style="color: red;">for answer</span>.
  
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Conceptual:
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Just a couple of more random factoids to drive you cra-cra. But honestly, if you're pressed for time you can probably get away with just memorizing the description of materiality given above. '''But''', make sure you know the RMAD stuff from ''[[COPLFR.SAO]]'' really, REALLY well!!
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:{| class="wikitable"
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|-
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| '''Question''': identify considerations regarding the <u>disclosure</u> of materiality in actuarial communications [Hint: <span style="color: red;">'''SIC'''</span>]
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|}
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:: <span style="color: red;">'''S'''</span>ophistication of user
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:: <span style="color: red;">'''I'''</span>mportance of concept to user
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:: <span style="color: red;">'''C'''</span>omplexity of concept ''(KISS: Keep it Simple Stupid!)''
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:{| class="wikitable"
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|-
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| '''Question''': identify possible actions of a report-writer based on materiality [Hint: <span style="color: red;">'''IRD'''</span>]
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|}
  
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:: <span style="color: red;">'''I'''</span>nclude item?
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::: - ask yourself whether the item should be <u>considered</u>
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:: <span style="color: red;">'''R'''</span>efine item?
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::: - ask yourself whether the item is sufficiently <u>accurate</u>
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:: <span style="color: red;">'''D'''</span>isclose item?
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::: - ask yourself whether the item should be <u>reported</u>
  
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Calculational:
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So that's it. I hope your own HR department doesn't mess up your salary offer like happened with poor Alice!
  
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==POP QUIZ ANSWERS==
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[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=AAA&suffix=Materiality&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>

Latest revision as of 12:53, 25 June 2024

Reading: “Materiality, Concepts on Professionalism,” Discussion Paper, Professionalism Series, 2006, No. 8, June 2006.

Author: American Academy of Actuaries (AAA), Task Force on Materiality

  Forum

BA Quick-Summary: Materiality
  • Question: When can a discrepancy be ignored?
  • Answer: When it is 'small enough' not to matter. (In other words, when it's not material.)

This reading discusses the concept of materiality.

Study Tips

This is an important topic, but it's already discussed thoroughly in the SAO (Statement of Actuarial Opinion) reading. You probably don't need to spend much time here.

BattleTable

  • this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.
reference part (a) part (b) part (c) part (d)
no prior questions

Full BattleQuiz You must be logged in or this will not work.

In Plain English!

Alice the Actuary just accepted an actuarial job offer at a salary of $120,000. Woo-hoo!

  • But the next day, HR called and said they'd made a mistake. The salary is only $119,500. Do you think she would accept the revised offer?
  • What if the revised offer were $115,000, or $110,000, or even lower.
Question: How low do you think HR could go before Alice would reject the revised offer?

Obviously this question doesn't have a single correct answer. (For Alice, it depends on this month's credit card bill.)

  • Let's suppose Alice would be willing to accept $115,000, but nothing less.
  • Then the level of materiality in this situation would be $5,000. That's because any reduction less than $5,000 would not affect her decision. But any reduction more than $5,000 would affect her decision.

That's the idea behind materiality:

==> What is the smallest amount that would change your decision?

Let's elaborate, but like true actuaries, do it in as confusing a way as possible. Joke. :-)

Question: describe the concept of materiality
  • An omission, understatement or overstatement in a work product is material if it is likely to affect either the intended principal user’s decision-making or the intended principal user’s reasonable expectations.
Pop Quiz!    :-o
  • Which company would likely have a lower materiality level regarding its net income?
Company A: incorporated in 1970
Company B: incorporated in 2016

Just a couple of more random factoids to drive you cra-cra. But honestly, if you're pressed for time you can probably get away with just memorizing the description of materiality given above. But, make sure you know the RMAD stuff from COPLFR.SAO really, REALLY well!!

Question: identify considerations regarding the disclosure of materiality in actuarial communications [Hint: SIC]
Sophistication of user
Importance of concept to user
Complexity of concept (KISS: Keep it Simple Stupid!)
Question: identify possible actions of a report-writer based on materiality [Hint: IRD]
Include item?
- ask yourself whether the item should be considered
Refine item?
- ask yourself whether the item is sufficiently accurate
Disclose item?
- ask yourself whether the item should be reported

So that's it. I hope your own HR department doesn't mess up your salary offer like happened with poor Alice!

Full BattleQuiz You must be logged in or this will not work.

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