Comparability is the quality of financial information that allows users to identify and understand similarities in, and differences among, items reported by different entities or by the same entity in different periods. Information about one company is far more useful when it can be set beside similar information about its competitors, or about its own past results, and the comparison is meaningful.
In the conceptual framework of the Financial Accounting Standards Board, comparability is one of four enhancing qualitative characteristics, alongside verifiability, timeliness and understandability. The fundamental characteristics are relevance and faithful representation; enhancing characteristics improve the usefulness of information that already has those qualities. The International Accounting Standards Board's framework uses the same structure.
Comparability in plain terms
Comparing the fuel economy of two cars only makes sense if both were measured the same way, on the same kind of road, in the same units. If one maker measured on a downhill track and the other in city traffic, the numbers would mislead.
Financial statements are the same. Investors want to compare companies and years, but they can do so only if like things are recorded alike and different things are shown as different. Comparability is the goal of making those comparisons fair.
Comparability and consistency
Comparability is closely linked to consistency, but they are not the same. Consistency means using the same accounting methods for the same items from period to period within a company, or in a single period across companies. Comparability is the goal; consistency is one of the means of achieving it. A company that switches inventory methods every year makes its own results hard to compare over time, even if each method is acceptable.
Comparability also does not mean uniformity. Treating dissimilar things as if they were alike reduces comparability. A lease that transfers ownership and one that does not should be reported differently, because they are economically different.
How standards support comparability
- Common standards. Generally accepted accounting principles narrow the range of acceptable methods, so companies record similar transactions in similar ways.
- Comparative statements. Companies present comparative financial statements showing prior periods beside the current one, and SEC registrants present several years of income statements.
- Disclosure of policies. Each company describes its significant accounting policies, such as inventory cost flow and depreciation methods, so users can adjust for differences.
- Accounting changes. When a company changes an accounting principle, US GAAP generally requires retrospective application to prior periods presented, with disclosure of the reason and effect, so trends are not distorted. A change in accounting estimate is applied prospectively and disclosed if material.
- Restating for share changes. Earnings per share for earlier periods is restated after stock splits and stock dividends.
Comparability in analysis
Analysts depend on comparability for horizontal analysis across years, ratio comparisons with competitors and industry benchmarks. Where methods differ, they adjust figures, for example converting a LIFO company's inventory to a FIFO basis using its LIFO reserve disclosure, or removing one-time items to compare underlying results. The full disclosure principle makes such adjustments possible by requiring companies to explain their methods and unusual items in the notes.
Limits to comparability
Perfect comparability is not attainable. Standards still permit choices, such as FIFO or LIFO for inventory and different depreciation methods, and many figures rest on judgment about useful lives, credit losses and fair values. Companies reporting under US GAAP and IFRS may account for the same transaction differently, although the two boards have converged in areas such as revenue recognition and leases. Industry practices differ, and a company's business can change so much through acquisitions that its own history becomes hard to compare. Cost is a further constraint: requiring every company to provide fully comparable detail could cost more than the benefit to users, a trade-off discussed under accounting constraints. Users should therefore treat comparisons as informed approximations and read the notes before drawing firm conclusions from differences in reported figures.