Financial Statement Comparability in a Principles-Based Reporting Environment: A Look at the Statement of Cash Flows

Comparability is the level of standardization of accounting information that allows the financial statements of multiple organizations to be compared to each other. This is a fundamental requirement of financial reporting that is needed by the users of financial statements. We can compare the ExxonMobil financial statements with that of BP if both are prepared in accordance with the same set of accounting standards, such as IFRS or US GAAP, etc. It does not require all companies to adopt the same accounting policies because doing so would impair relevance. Comparability is achieved when companies present information such that knowledgeable users may adjust their financial statements so as to make them comparable to other periods/companies. Understandability is the degree to which information is easily understood.

The IAS 16 suggests that the land or building held for use in business must be valued either on cost basis or revaluation basis . After choosing the basis for valuation, the company cannot do cherry picking and will have to value all the land and buildings according to the selected basis. Additionally, the business cannot change the basis of valuation according to their suitability.

The Struggles of Private Company Accounting

In fuel and power industry, only three companies are inconsistent in the SOP. However, in pharmaceutical industry, no company is consistent in SOP and in addition; Beximco Pharma shows inconsistency in reporting period.

This also would enhance international comparability for the benefit of investors and other capital market participants. Sound internal financial reporting controls is a prerequisite if the value relevance benefits of accounting comparability are to be achieved. The lack of strong internal controls over financial reporting leads to investor skepticism and questions about whether disclosed accounting policies are applied Comparability Principle properly. Notably, we find that reporting an internal control material weakness eliminates any additional value relevance of earnings that can be obtained under high accounting comparability. Analysts, for instance, tend to avoid covering firms with low comparability. After all, the information processing costs are higher for such firms due to the difficulty of benchmarking and understanding their financial statements.

What is the Materiality Concept?

However, the amount of the expense is so small that no reader of the financial statements will be misled if you charge the entire $100 to expense in the current period, rather than spreading it over the usage period. In fact, if the financial statements are rounded to the nearest thousand or million dollars, this transaction would not alter the financial statements at all. Assume Entity A and Entity B each buys a piece of construction equipment https://simple-accounting.org/ for 200. Entity A classifies the equipment as inventory and Entity B classifies it as property, plant, and equipment. Six months later, both entities still own the equipment; Entity A holds it in inventory and B has depreciated it because it is available for use, but Entity B has not used it. In its income statement, Entity A displays revenue and expense, which net to the amount of the gain, and Entity B displays the gain net.

Watts and Zimmerman developed the positive accounting theory to explain and predict firm’s choices on accounting practices. The theory hypothesizes that accounting choices may be determined by managers who want to influence reported earnings and capital structure in imperfect markets. Watts and Zimmerman further noted that the companies having higher information asymmetry among managers and external investors are more conservative in financial reporting. This conservatism is also influenced by the managers’ specific characteristics and GAAPs (Ge et al., 2011). The information asymmetry resulting from the agency theory can also describe the financial reporting quality . Sweeney exposed managerial motivation to adapt income increasing accounting policies to inflate reported net income of the firm.

Don’t Overlook Accounting Comparability

The accountant strives to provide an accurate and impartial depiction of a company’s financial situation. GAAP is used mainly in the U.S., while most other jurisdictions use the IFRS standards. Under the partnership agreement, after paying him $10,000, you would share equally in all future profits. Which of the two income measures above would be more useful in deciding whether to become a partner? Accounting Today is a leading provider of online business news for the accounting community, offering breaking news, in-depth features, and a host of resources and services. Ahmet C. Kurt is an assistant professor of accounting at Bentley University. He holds a PhD degree from the University of Pittsburgh and an MBA degree from the University of Alabama.

• All the companies, except ACME in pharmaceutical industry, use historical cost to report their assets on the balance sheet.
• This article discusses a case study to evaluate the sensitivity of various methods in a comparability assessment of three lots of an IgG1 monoclonal antibody .
• GAAP covers such topics as revenue recognition, balance sheet classification, and materiality.
• In practice, since much of the world uses the IFRS standard, aconvergence to IFRScould have advantages for international corporations and investors alike.
• Unfortunately, standard setters have yet to identify such an alternative measure.