Question

Two of the qualitative characteristics (I will call them concepts) of high-quality accounting information are comparability and consistency. Comparability means that different companies report the same account using similar standards. Consistency means the same company reports the same account from year to year using similar standards across years.

Option 1.

Please provide an example of these of comparability and consistency. Also please provide exceptions when you think it is appropriate to depart from these concepts.

Option 2. If you prefer to demonstrate by actual example, choose two companies in the same industry to illustrate how they report an account in a comparable manner. Compare the footnote disclosures for the account by the two companies. Also, for one of the companies, examine the same account and footnotes five years earlier.

Answer 1

Fundamentally comparability would mean same principles across all business enterprises. This also includes consistency which implies similarity across periods. Thus consistency would be considered a subset of comparability.

The financial statements of an entity of one accounting period must be comparable to another in order for the users to derive logical and meaningful conclusions about the trends movements in the entity's and the industry’s financial position and performance over a period of time (i.e. multiple years). The comparability of financial statements over different accounting periods can simply be ensured by the application of the same accountancy principles and policies over a period of time (i.e. multiple years) which is also known as consistency.

An exception rule could be: An accounting policy change of an entity may be needed to improve the reliability and relevance of the financial statements. In these cases, a change in the accounting policy may also be imposed by changes in regulatory pronouncements or accountancy standards. For these cases, the nature and the circumstances leading to the change along with its impact must be disclosed in the financial statements.

Example: If a company that sells laptops values its inventory on the basis of FIFO method till date, it must continue to do so in the future to preserve consistency within the different years of the financial statements in the reported inventory balance. A change from FIFO to weighted average or LIFO basis of inventory valuation may cause a change in the value of inventory between the accounting periods largely due to seasonal fluctuations in price. This is consistency. If some other company does the same it creates a comparability issue.