In preparing financial statements and other reports, it is essential to be objective rather than subjective. This means that business transactions are objectively measured with substantial evidence to ensure the reliability of the financial report. This article explains the objectivity principles.
What is the Objectivity Principle
The principle states that financial statements must be free from bias from internal and external people. When a financial report is free from bias, the benefit is that it will be fair, accurate, and reliable. It implies that all users of accounting information were considered when preparing the statements. Therefore, the information is accurate and can be relied on by the users.
Internal people who can influence the financial statements are the top-level managers and accountants. For example, directors decide to influence the way reports are prepared so that they can secure huge amounts of loans from the bank. Accountants who want to reduce tax payments may increase expenses to achieve this.
External people can also want to influence financial reports. For example, the bank’s template for recording financial reports is decided by the central bank. Although, this is legal and positive.
Objectivity is achieved when the preparer (mostly accountants) considers all aspects of the transactions before deciding their entry in the book of accounts. This might be explained this way. Assume Tobi went to the market to buy a shirt. The seller told him N150,000, and he made the payment. Let's consider Michael who decides to find out the price from two sellers before deciding to buy at N150,000.
Who is objective? Michael is objective in his decision. Why? He took action to buy after knowing a fair price in the market. This is also true in business. Objectivity is paramount when making decisions regarding each business transaction.
How preparers (accountants) apply the objectivity principle
When a transaction occurs in an entity accountants ensure that there is a supporting document. Concepts and conventions are applied to ensure proper accounting entries. IFRS standards help accountants determine the line items on the financial statements.
How auditors use the objectivity principle
External auditors are expected to provide an opinion about the true and fair view of an entity's financial report. The Objectivity principle helps them to achieve this. Substantial evidence has been gathered from the company. Then, the auditor examines whether IFRS standards were applied in preparing the statements.
Financial modellers and the objectivity principle
These finance professionals create models by applying the above principle. If they ignore this principle, it will be assumed that their forecast is based on dreams and not facts. To avoid this, models are prepared through research. To be objective, the financial modeller must understand the business. He or she knows how to apply IFRS standards, and the applicable valuation method.
Objectivity principles significance
This accounting principle is important for the following reasons:
Accuracy
Applying the objectivity principle ensures the accuracy of the transaction. Business transactions recorded in the books of accounts are unbiased but reliable. It thereby aids accuracy on the part of the accountants.
Integrity of information
The accounting information provided to users must be trustworthy. This is what this principle ensures. Since the information is fair and does not discriminate, it improves the iñtergrity.
Better decision
Accuracy and integrity build credibility of information. As a result, the users can make better decisions through the analysis of financial statements.
In summary, this principle ensures fairness in business transactions. Financial data that can be traced, tested, and IFRS standards compliance can be referred to as providing objective information.