Comparability definition
/What is Comparability in Accounting?
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 to compare financial results between reporting periods, as well as between reporting entities.
Financial statements are more comparable when the same accounting policies and accounting standards are applied across multiple reporting periods, as well as across multiple entities within an industry. For example, if a number of oil and gas firms consistently apply the same industry-specific accounting standards to their financial statements, then there should be a high level of comparability within that industry. Similarly, a business that reports comparable financial statements over time gives investors the opportunity to review its financial results on a trend line, across multiple reporting periods.
Example of Comparability in Accounting
Consider two companies, Swan Corporation and Duck Company, operating in the same industry. If both companies prepare their financial statements in accordance with International Financial Reporting Standards (IFRS), stakeholders can compare their performance more effectively. Here is the situation:
Swan Corporation recognizes revenue when goods are shipped.
Duck Company recognizes revenue when goods are delivered.
If stakeholders are unaware of this difference in revenue recognition policies, it could distort comparisons of revenue and profitability between the two companies. By requiring both companies to adhere to the same revenue recognition standard under IFRS 15 (Revenue from Contracts with Customers), comparability is improved.
Comparability Best Practices
In order to achieve comparability in accounting, a business needs a set of standardized accounting policies and procedures, as well as a formalized closing process. In addition, its staff must be trained in how to use these policies and procedures consistently. This approach is needed to ensure consistency in the formulation of financial statements.