Importance of Objectivity in Accounting
Objectivity – To provide information useful to investors creditors, and others. The concept of objectivity seems obvious, but we always need to keep the end goal in mind, the creation of useful information for external users. Financial accounting is aimed at producing useful information for external users like investors, creditors, and customers, the format of this information usually being financial statements. By anticipating the needs of external users, we can set rules and guidelines to provide the most value.
Qualitative Characteristics – What Needs to be Known
Qualitative Characteristics – To require information that is relevant, reliable, and comparable. The characteristics of relevance, reliability, and comparability are related to the objective of providing useful information because external users will value these features.
- Relevant means the information is relevant or necessary to the needs of the users. Relevant information could be information that influences the decision-making process. For example, a bank deciding whether to make a loan to a business may request financial statements to assess the likelihood of a business’s ability to pay the loan back in the future.
- Reliable means that the information must be trusted or must be believed that it is free of material errors and is presented in a fair way. For example, a bank deciding whether to make a loan to a business may request financial statements and want assurance that they can be trusted. The assurance required may be that the financial statements are presented in a standardized form, following a standardized set of rules. A bank may also ask for a third party review or audit to add to the level of reliability.
- Comparability means that financial information needs to be comparable to prior period and other companies. Comparability requires standardization, a systematic way of compiling data from one time to the next. For example, a bank deciding whether to make a loan to a business may want to compare financial statement performance with prior years to see if there has been an improvement and to compare financial statements to other businesses in the industry. For comparisons of financial statements to be relevant, there needs to be conformity in presentation.