Examples of Objectivity Principle
1. Asset Valuation: When it comes to asset valuation, objectivity is essential for sound financial management. Companies that use objective and verifiable metrics like market prices and professional valuations have more transparent and trustworthy financial records. This approach reduces the potential for subjective bias, ensuring that a company’s true financial worth is accurately reflected in financial records.
2. Revenue Recognition: Revenue recognition is governed by the objectivity principle which states that businesses should only report sales when they are certain that services have been delivered and the earnings process has been deemed to be completed objectively.
3. Fair Value Measurement: Fair value measurement ensures objectivity by using observable market prices and reliable valuation techniques to determine the value of financial instruments and financial assets. This approach ensures valuations are based on real-world information, eliminating the room for bias.
4. Depreciation: Depreciation follows the objectivity principle by using techniques such as the straight-line method and the declining method. These processes are based on transparent and objective criteria that ensure transparency, consistency, and reflect the true economic use of the asset thereby ensuring compliance with the principle of objective financial reporting.