Accounting Comparability

//Accounting Comparability
Accounting Comparability 2017-10-11T06:33:15+00:00

Comparability is a quality of accounting information that addresses the usability of financial information. Information that is prepared using the same measurement techniques and reported in a similar fashion is considered comparable information because this information is similar and can be judged side by side other similar financial information.

Comparability is extremely important to the end users of financial statements. If financial statements can’t be compared with other statements, what good are they? You wouldn’t be able to compare a company’s performance from year to year let alone two competitors’ financial statements. Without being able to compare and benchmark financial statements, the accounting information would be pretty useless.

Without the concept of comparability, financial ratios would not exist. You wouldn’t be able to compare two companies’ financial information with ratio analysis because their financial information wouldn’t be compatible. It would be like comparing apples to oranges. You could get a rough estimate on the worth of the company, but an accurate comparison wouldn’t exist.


Examples

– Assume that company A uses the FIFO inventory method and company B uses the LIFO inventory method for valuing its inventory. All else being equal, company B’s financial statements would most likely show less income because of a higher cost of goods sold. Company A would conversely have a lower income but higher inventory. These two companies don’t have comparable financial statements. They use different methods of accounting. In order to compare these statements properly, you must convert one of their inventory methods to match the other.

– US GAAP and the International Standards or IFRS have many standards in common, but they also disagree on many common accounting practices. For instance, US GAAP allows for a different method of accounting for pension programs. This means that a US based company like GM won’t use the same accounting methods as a foreign-based company like Toyota. These two company pension liabilities and pension funding will be reported differently. This means the two companies are not comparable in this respect. Luckily, most foreign companies still report their statements on US exchanges using GAAP, although this is likely to change in the future as IRFS is more widely adopted.

– Currency is another form of comparability. Financial statements presented in different currencies can’t be compared at face value. They must be converted into the same currency in order to be compared meaningfully.