FASB, Financial Accounting Standards Board. All financial statements must be comparable to the next or previous ones so it shows meaningful conclusions. Required fields are marked *. Moreover, a higher valuation of earnings can help boost the value of executives’ compensation packages, which often include a significant equity component. This is a fundamental requirement of financial reporting that is needed by the users of financial statements. Is managers’ having flexibility in their accounting decisions good? Comparability in accounting is what we define as the financial information provided in statements being comparable across different time periods. The initial period of the lease is four years and the implicit interest rate in the leased is 13.7%. An example is provided by the national incomes of the USSR and the USA. Accounting comparability is one of the enhancing characteristics of financial reporting in the United States and around the world. Define comparability. It would be like comparing apples to oranges. The problem of comparability also arises in computing relative and average values in statistics. It requires that financial information must be comparable from one accounting period to another. For example for three consistent years the company valued its buildings and land on cost basis, and in forth year they changed the valuation to revaluation basis, just to show a better picture of the. In addition to the variation in accounting policies observed across industry peers, there is also considerable variation in firms’ accounting consistency over time. The comparability is achieved when the entity follows same accounting rules which are followed by every business in the industry and/or as directed by law of jurisdictions. International Accounting Standards and International Financial Reporting Standards are the accounting standards that are universally accepted with adjustments according to the specific regulations of different countries. These two companies don’t have comparable financial statements. 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. Financial statements' primary purpose is to serve the needs of users. The IAS 1 (International Accounting Standard for “Presentation of. Your email address will not be published. Because of this, you won’t be able to compare the financial statements from the switch to LIFO from FIFO. https://encyclopedia2.thefreedictionary.com/Comparability, In summary, "New Alternatives for Autoimmune Disease Treatments: Physicochemical and Clinical, Thus, we recommend revisions be made to encourage tax administrations to make appropriate adjustments to the taxpayer's TNMM method to ensure, Secondly, due to the gaps and inconsistencies in the IFRS standards and the absence of industry-related accounting guidance, IFRS implementation has required that extensive judgement be used in selecting and applying IFRS accounting treatments, again reducing consistency and, Annual audited GAAP financial statements for accuracy and, * Perhaps a matrix approach should be applied to, It is simply that the size of the associated uncertainties approach, accounting is "rules-based." There are also other reasons such as switching to a different accounting professional. Because of this, the methods used in accounting must be the same in order for the next financial statements to make sense. They must be converted into the same currency in order to be compared meaningfully. A conversion must therefore be made to comparable prices. Financial statements presented in different currencies can’t be compared at face value. But, when investors place greater value on earnings as a result of high accounting comparability, firms can raise equity financing at more favorable terms and thereby leave less money on the table. Such a lack of comparability can occur in the statistics of a single country if the methods of computing an index change. Find more ways to say comparability, along with related words, antonyms and example phrases at Thesaurus.com, the world's most trusted free thesaurus. But there is a quandary as to who is a "user" and what users need, particularly for private companies. For instance, US GAAP allows for a different method of accounting for pension programs. All Rights Reserved. Ahmet C. Kurt is an assistant professor of accounting at Bentley University in Waltham, MA. This is one of the most important aspects of accounting in general. In fact, creditors have been shown to consider borrowing firms’ accounting comparability when making their lending decisions.