Accounting Standards are applicable to the Items, which are shown in the Financial Statements of an Enterprise and the Items should be of Material in nature. An item in the Financial Statement is likely considered to be a Material, if it is likely to affect the economic decision of the Enterprise.
The Materiality is not primarily considered by its size, but it is mainly the information. If we say it in clear, an Item in the Financial Statement is important.
For instance, A Company, which is incurring crores of rupees in a years would have to pay a penalty of Rs. 50,000/- for breach of law. Even though it is very small amount for the company, yet the item Penalty having the Materiality in nature as it conveys the information. Therefore, the materiality should be judged on case to case basis.
If an Item in the Financial Statement of an Enterprise is of Material nature, it should be shown separately in the Financial Statements of the Enterprise rather than clubbing it with other items of the Statements. For instance, in the above said example it is advisable to show the Penalty as a separate item rather than clubbing it with the Legal Charges.
And this is how to know an Item in the Financial Statement is applicable to the Accounting Standards.