Final answer:
The relative percentage for establishing overall materiality for public companies is typically determined based on the Herfindahl-Hirschman Index (HHI), which measures market concentration. A higher HHI indicates a more concentrated market. A relative percentage of HHI below 1500 is considered low, while an HHI above 2500 is considered high.
Step-by-step explanation:
For public companies, the relative percentage for establishing overall materiality is typically determined based on the Herfindahl-Hirschman Index (HHI), which measures market concentration. The HHI is calculated by squaring the market share percentages of all firms in the industry and summing them. A higher HHI indicates a more concentrated market, which may be a concern for competition. In general, a relative percentage of HHI below 1500 is considered low, indicating a less concentrated market, while an HHI above 2500 is considered high, indicating a highly concentrated market.
For example, if a public company operates in an industry with an HHI of 2000, the relative percentage for establishing overall materiality could be set at 10%. This means that any misstatement or omission that could impact the company's financial statements by 10% or more would be considered material.