Diverging views on the attribute of ‘comparability’ for financial reporting under IFRS
Six guest lectures at Stockholm School of Economics passed by and one word left a permanent mark on my mind. With a high regularity and consensus the representatives of different interest groups involved in financial reporting mentioned ‘comparability’, sometimes referred to as ‘consistency’ or ‘continuity’, as one particularly important attribute of good financial reporting.
Heurlin (2011, p. 8/12), as an IASB member, stressed the need to acknowledge consistency in financial reporting, which he regards as a proxy for good financial reporting. Scheja (2011), in his auditor role, stated that PwC has a major focus in auditing on ensuring comparability of financial reporting, i.e. by preventing the usage of non-GAAP measures for earnings management. According to him, the attribute of relevance is mainly ensured by preparers. Also, Gerentz (2011) mentioned the term comparability twice; first, stating that NCC aims at preventing managerial opportunism in IR, and second, stressing the need for NCC to create peer comparability by educating analysts about their own “more correct IFRS interpretation”. Last, Malmqvist (2011), representing analysts, pointed out the importance that firms enable peer comparability, i.e. by providing comparable income statements without company-specific non-GAAP measures, where irregularities are explained in footnotes, and by using more comparable accounting methods.
So, on this point: All united? As opposed to the otherwise often diverging opinions, all interest groups1 strikingly seem to be aligned that comparability constitutes good financial reporting. But do the involved interest groups really share one joint perception about the attribute ‘comparability’ for financial reporting? In particular, is the IASB’s idea of comparability defined in the framework widely accepted in practice? Considering the different interests of involved groups, one might doubt that those groups really share a common understanding, opinion and rationale with regards to ‘comparability’. This paper reflects upon the two questions by taking three explicit perspectives: (1) IASB, (2) preparers, and (3) analysts / investors.
From the IASB’s viewpoint
For the IASB, comparability is an ‘enhancing qualitative characteristic’ defined in the IFRS framework (2010, QC20). But somehow, I would claim that it plays more than this relatively ‘minor role’. Doesn’t the IASB’s right to exist, the promotion of a global convergence in financial reporting, mainly base on the idea of enabling investors to easily compare investments across national (GAAP) borders? Thus, global comparability would increase the efficiency of global capital markets by reducing information asymmetries and hence the cost of information.
But starting from the IFRS framework, the IASB states that “relevant and faithfully represented information is most useful if it can be readily compared with similar information reported by other entities and by the same entity in other periods” IASB (2010, BC3.33). And further explains that the comparability of information is the targeted ends, while consistency with regards to applied accounting methods and choices is a contributing means (IASB, 2010, QC22). It is stressed that comparability cannot be equated with uniformity, as the former “is not enhanced by making unlike things look alike” (2010, QC23). Also, the framework admits that different choices on how to faithfully represent a single economic phenomenon diminish comparability (2010, QC25).
However, while the contribution of IFRS to the overall cross-border comparability as compared to various national GAAPs remains unquestioned (Véron 2007), one might ask himself whether the IASB’s new framework lost focus on comparability as concerns the method variety. In order to depict economic realities better, the IASB, as we discussed in course 3305, shows an increased focus on the underlying business logic, e.g. control situations, model-based valuations and revenue recognition schemes. As a result, one might argue that the IASB increasingly limits the comparability across firms and over time, because of the variety of accounting methods and judgments. However, taking a different glance at it, as the IASB argues, comparability across firms increases as the changes allows for a more relevant depiction of similar but still different economic phenomena, thereby preventing that “unlike things look alike” (IASB 2010, QC23).
This might lead to inherently different views on the ideal form of comparability. The IASB focuses on demanding investors, not analysts using reports for simple earnings multiples (Heurlin, 2011). Hence, the IASB mainly bases on the later ‘economic phenomena-argument’, thus decreasing comparability at first sight for the sake of providing investors with more relevant information. Still, this is no overall pull-back as regards comparability, rather it adds on crucial facet to the IASB’s unchanged demand for consistency in a firm’s accounting choices and treatment.
Considering the resulting complexity of the IASB’s position, are preparers and investors capable of handling financial reports in a comparable manner without distorting market efficiency?
From an preparers’ viewpoint
According to IASB (2010, QC24), “a faithful representation of a relevant economic phenomenon should naturally possess some degree of comparability”. This comparability is based on the idea that both the underlying IFRS accounting regime and its interpretation are (ideally) identical across firms. But for preparers there is a longer way to go to achieve comparability for investors, next to passively complying with and actively applying IFRS standards in a consistent manner.
Regarding the different views on comparability, brought up in the previous section, one needs to stress that the preparers are not the target user group that is supposed to benefit from comparability in the first place. Thus, preparers’ position on this probably varies depending on the lobbying interest involved in particular standard and whether the benefit of a more exact depiction outweighs the complexity of preparing. In the end, preparers need to handle the IFRS’s method diversity consistently, i.e. by providing disclosures that actually enable investors to compare economic phenomena even across firms using other methods. Sometimes in situations where accounting choices or the degree of usage distort peer comparability; the negatively affected firms might stand out to create comparability in their own interest. For example, Gerentz (2011) mentioned the need for NCC to justify the ‘more correct IFRS interpretations’, leading - relatively to their competitors - to ‘disadvantageous’ on-balance accounting of property project developments and late recognition of revenues.
1 In this context, the term ‘all’ is limited to interest groups on a global level (MNCs / global capital markets / IASB). On a national level, the implementation of IFRS might even lead to less comparability of financial reports.
- Quote paper
- Christian Betz (Author), 2011, What Constitutes Good Financial Reporting?, Munich, GRIN Verlag, https://www.grin.com/document/178162