Comparability principl

As briefly discussed in the chapter “characteristics of financial information”, comparability is one of the qualitative characteristics of useful financial information. Comparability requires that financial information presented should be comparable if it is to be of use for the users of the financial statements.

Comparability of information is a characteristic which helps the users to identify similarities and differences among various items. Financial information of an entity which can be compared to the entity’s prior periods information or which can be compared to similar financial information of other entities in the same industry is often useful for analysis purposes, for example, trend analyses, various industry specific analyses etc. For comparison purposes, most of the accounting standards require that corresponding figures of previous year should also be presented in the annual financial statements of entities.

It is important to understand the reason for this accounting principle. Just think about the decision-making needs of users! For instance, some investors are thinking about investing in real estate projects. They have options from various real estate management companies. Before deciding, the investors will compare and evaluate various options available and if one of the entity’s information is not comparable to other entities, they will most likely ignore that option and compare the rest of the options. So, the point is, comparability is critical for financial information to be useful.