Comparability concept of accounting

By: Rashid Javed | Updated on: July 23rd, 2022

Definition and explanation

The comparability concept of accounting states that the users of financial reports of a business must be able to compare these reports with previous years’ reports as well as with reports of other entities dealing in the same industry.

The comparability concept suggests that the financial reports or statements must be prepared under same accounting principles and methods each year. If any transactions require subjectivity, then such transactions must be dealt with same consistent manner every year. 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. Some countries implement these standards as they are with little to nil modifications. This ensures that the companies around the world prepare their annual reports according to same accounting rules and principles which makes it possible for the users (shareholders, debt holders, potential investors, analysts etc.) to compare the performance of different businesses around the globe.

Examples:

  1. The IAS 16 (International Accounting Standard for Property, Plant and Equipment) suggests that the land or building held for use in business must be valued either on cost basis (original value) or revaluation basis (market value). 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. 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 balance sheet, and then again valued property, plant and equipment on cost basis in the fifth year. This is against the comparability concept of accounting and is therefore not allowed.
  2. The IFRS 16 (International Financial Reporting Standard for Leases) suggests that if a company is paying lease rentals under an operating lease arrangement, these lease rentals must be expensed out in profit and loss statement.
  3. The comparability concept also applies to the formats of financial reports. The IAS 1 (International Accounting Standard for “Presentation of Financial Statements”) guides about formats in which the financial statements must be prepared. For example:
comparability concept of accounting

The presentation of liabilities is different in both years, which is not appropriate as it does not ensure comparability of financial reports/statements.

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