Evaluation of the Treatment and Corresponding Materiality Four the Six Post-Closing Entries.

To: The Framework Company

From: Yujie (Jack) Zhang, …

Topic: Evaluation of the treatment and corresponding materiality four the six post-closing entries.

1. For this entry, a regulator imposed a fine on one of Framework’s foreign subsidiaries for its unlawful and predatory banking practices. The company got fined $100,000, which increased the company’s expense and liability. Although the amount of the fine is not quantitatively material, this penalty will affect the company’s future products and earning ability. Therefore, this financial information is capable of making a difference in the decisions made by users and is qualitatively material. The company should record this entry in the current accounting period due to qualitative materiality.
2. For this entry, a contractor built a building for the company, and the company occupied the building at year-end. The invoice was late in being prepared by the contractor. For this building, the company should pay $10,750,000, which will increase an asset and a liability. This amount impacting the balance is slightly less the 5 % and should not be considered quantitatively immaterial. Nonetheless, this entry indicates an increase of an important asset. As a result, this entry is qualitatively material since this financial information is capable of making a difference in the decisions made by investors, lenders, and other creditors. The company should record this entry in the current accounting period due to qualitative materiality.
3. In this entry, the internal auditor found there were automobiles returned from leases with losses totaling $175,000, the delinquency rate for the company’s foreign leasing operations was increasing and the amount of returned automobiles in early 2011 could be significant. This entry of loss is quantitatively material since the amount impacting net income is higher than 3%. This entry is also qualitatively material since it provides predictive information related to one of the company’s most profitable lines of business.  The company should record this entry in the current accounting period due to both quantitative and qualitative materiality.
4. In this entry, the company received an unfavorable court ruling, and $ 200,000 expense would be recognized due to the ruling. This entry is quantitatively material since the amount impacting net income is higher than 3%. This entry is also qualitatively material since the ruling will affect the company's future profit and is capable of making a difference in the decisions made by users. Consequently, the company should record this entry in the current accounting period due to both quantitative and qualitative materiality. Also, it may not be possible to verify the $200,000 expense until a future period. Therefore, to help users decide whether they want to use that information, it normally would be necessary to disclose the underlying assumptions, the methods of compiling the information, and other factors and circumstances that support the information.
5.  For this entry, a court ordered the company to pay $325,000 compensatory and punitive damages. This penalty will increase the company’s expense and liability; since the amount impacting net income is higher than 3%, this entry is quantitatively material. This entry is qualitatively material as well since the ruling will affect the company's future profit and is capable of making a difference in the decisions made by investors, lenders, and other creditors. Thus, the company should record this entry in the current accounting period due to both quantitative and qualitative materiality.
6. For this entry, the company received a recovery of a previously charged-off loan, and due to a mistake the company did not record the entry on time. This entry will increase an asset and decrease an expense. The $200,000 the company received is higher than 3% of net income. Therefore, this entry is quantitatively material. Though the entry is not qualitatively material, the company should still record this entry in the current accounting period due to quantitative materiality

As we can see, qualitative and quantitative characteristics of financial information discussed in the aforementioned six post-closing entries may produce different results in regard to information’s materiality. As a result, the company should take a serious consideration on these two characteristics in order to better identify the types of information that are likely to be most useful to the existing and potential investors, lenders, and other creditors for making decisions about the company.