The Objectivity Principle
The objectivity principle in accounting suggests that the information that is reported in the financial statements should be supported by objective evidence. This means that the amounts of recorded transaction are verifiable. In the conceptual framework of accounting, relevance and reliability are the two fundamental qualitative characteristics of financial information. Verifiability is considered one of four enhancing qualitative characteristics – it helps to add reliability to financial information. The other three enhancing characteristics are comparability, timeliness and understandability.1
Verifiability or objectivity means that different people looking at the same information will arrive at the same values for an economic phenomenon. Information can either be directly verifiable (by counting cash, or checking a bank statement) or indirectly verifiable (by knowing the inputs and the model, formula or other technique used to value or allocate an item). As a result, transactions based on objective evidence must be based on fact, not simply personal opinion or feeling.
Typically transactions that are recorded will have what is called a source document. This source document might be a contract or a sales receipt, and shows the amount that was agreed upon by the seller and buyer in the transaction.
In US GAAP, the objectivity principle is found in discussion about when assets, liabilities, revenues, expenses, and the like are to be recognized in the financial statements. For example, the SEC requires that revenue be recognized only if persuasive evidence of an arrangement (such as a sales contract) exists.2 Solutions Available for Instant Download
What does the term self-objectivity mean to you?
What does the term self-objectivity mean to you, and why is it important for leadership?
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