Comparability – An enhancing qualitative characteristic that enables users to identify and understand similarities in, and differences among, items.
The Conceptual Framework provides the following guidance [Conceptual Framework 2.24 – 2.29]:
Users’ decisions involve choosing between alternatives, for example, selling or holding an investment, or investing in one reporting entity or another. Consequently, information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date.
Comparing Financial Statements between companies is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. Unlike the other qualitative characteristics, comparability does not relate to a single item. A comparison requires at least two items. Consistency, although related to comparability, is not the same. Consistency refers to the use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities. Comparability is the goal; consistency helps to achieve that goal.
Comparing Financial Statements between companies should not be confused with mere uniformity and it should not be allowed to become an impediment to the introduction of improved accounting standards.. For information to be comparable, like things must look alike and different things must look different. Comparability of financial information is not enhanced by making unlike things look alike any more than it is enhanced by making like things look different. Some degree of comparability is likely to be attained by satisfying the fundamental qualitative characteristics. A faithful representation of a relevant economic phenomenon should naturally possess some degree of comparing Financial Statements between companies with a faithful representation of a similar relevant economic phenomenon by another reporting entity.
Although a single economic phenomenon can be faithfully represented in multiple ways, permitting alternative accounting methods for the same economic phenomenon diminishes comparability.
Comparing Financial Statements between companies in financial reporting measurements has at least four aspects.
- Consistency in the treatment of different items and different transactions.
- Comparability of information across different reporting entities.
- Consistency across reporting entities in the measurement of similar items and
- Comparability over time.
The third item on the list may appear to be implied by the second. But at present, while different entities’ reported numbers may well be comparable in the sense that they use the same measurement basis, they may nonetheless measure similar items at different amounts – because the items have different historical costs, for example.
Comparing Financial Statements between companies is not an overriding objective. There is often a trade-off between comparability and other desirable qualities of financial reporting information. For example, it is often sensible for accounting requirements to change, which reduces comparability over time. And information that is cost-effective for one company may not be for another.
Consolidation and comparability
Another way of looking at comparability represents the requirements regarding consolidation and investment entities (holdings a variety of investees). An investment entity’s control of an investee may change from one reporting period to the next. Without the exception to consolidation, an investment entity could be required to consolidate an investment in one period and present it as an investment measured at fair value through profit or loss in the following period (or vice versa).
This would reduce comparability between reporting periods. With the introduction of the exception to consolidation, an investment entity can report all investments at fair value, regardless of whether those investments are controlled. This will improve the comparability between reporting periods.
One of the main benefits of international accounting standards relates to increasing the global comparability of financial statements is to facilitate international capital flows.
In summary, it is clear that IFRS adoption has provided instances of improved cross-border comparison opportunities of voluntary expense disclosures and reduced the variability of financial statement ratios. The studies that considered IFRS adoption and the international consistency of accounting policy choices, however, reported mixed results. Collectively these mixed results concerning the outcomes of IFRS adoption in promoting the global comparison opportunities of financial statements of companies suggest that local (historical) differences take a longer time to vanish. A summary of the main findings is:
- Post-IFRS adoption, mandatory fair value requirements in relation to financial instruments and share-based payments have increased comparison opportunities.
- The results showed some statistically significant reductions in the variability of ratio measures in the post-IFRS period which indicated a reduction in financial reporting diversity.
- The results suggested that the IFRS adoption in Australia, Hong Kong, and the United Kingdom has improved the comparability of goodwill and deferred taxation practices.
- Post-IFRS adoption, national patterns in accounting policy choices are still apparent and concluded “international comparability remains in doubt”
- Following IFRS adoption, there are highly significant differences between the policies of small and large companies. However, smaller companies make more homogenous choices, within a country, compared to large companies.
- The findings suggested that IFRS adoption has improved firms’ consistency in reporting expenses.
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