Difference between revisions of "AAA.Materiality"
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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>. | :* 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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| + | A better type of question, however, is to present you with facts about 2 different companies, and ask which would have a higher/lower materiality level. | ||
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| + | : '''Pop Quiz''': Which company would likely have a <u>lower</u> materiality level regarding its <u>net income</u>? | ||
| + | :: <u>Company A</u>: incorporated in 1970 | ||
| + | :: <u>Company B</u>: incorporated in 2016 | ||
| + | : '''Answer''': ''Company B''. It's at a much earlier stage in its organizational life cycle. Its net income is likely much lower so smaller swings in net income would have a proportionately greater impact on decision-making ''(versus Company A.)'' | ||
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Revision as of 17:45, 12 March 2019
Question: When can a discrepancy be ignored? Answer: When it is 'small enough' not to matter. (In other words, when it's not material.)
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
Based on past exams, the main things you need to know (in rough order of importance) are:
- this reading has not been tested on any exam from the year 2012 and subsequent
reference part (a) part (b) part (c) part (d) no prior questions
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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.
A better type of question, however, is to present you with facts about 2 different companies, and ask which would have a higher/lower materiality level.
- Pop Quiz: Which company would likely have a lower materiality level regarding its net income?
- Company A: incorporated in 1970
- Company B: incorporated in 2016
- Answer: Company B. It's at a much earlier stage in its organizational life cycle. Its net income is likely much lower so smaller swings in net income would have a proportionately greater impact on decision-making (versus Company A.)
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