AAA.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.)

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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

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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.

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

• Click here for answer.

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!

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