Comparability is one of the enhancing qualitative characteristics of useful financial information. Comparability allows users to compare financial position and performance across time and across companies.
Comparability is achieved by consistency. Consistency refers to application of accounting standards and policies consistently from one period to another and from one region to another.
Comparability improves usefulness of financial statements because it allows users to carry out trend analysis, cross-sectional analysis and common-size analysis. Trend analysis helps us see whether a company's position and/or performance has improved across time. Cross-sectional analysis compares a company's performance with its peers.
Comparability does not necessarily mean uniformity. 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.
- We can compare 20X2 financial statements of ExxonMobil with its 20X1 financial statements to know whether performance and position improved or deteriorated.
- 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.
- When preparing 20X3 financial statements we are required to present with each of the 20X3 figure the corresponding 20X2 figures. This is done to improve comparability of financial statements.
- A company valuing its inventories on FIFO basis may choose to disclose the inventory values under the weighted-average method. This would allow an analyst to adjust the company's financial statements to make them comparable with those of a peer company using a weighted-average method.
by Obaidullah Jan, ACA, CFA and last modified on