Global Comparability in
Financial Reporting: What,
Why, How, and When?
Mary E. Barth
Stanford University
May 2012
What is comparability?
• Comparability is the qualitative characteristic
of financial reporting information that
enables users to identify and understand
similarities in, and differences among, items
– Makes financial reporting information more useful
because the information can be compared to similar
information about other entities or the same entity at a
different time
– Does not relate to a single item; comparability requires
at least two items
2
What is not comparability?
• Comparability is not consistency
– Consistency refers to the use of the same methods for
the same items; comparability is the goal, consistency
helps achieve that goal
• Comparability is not uniformity
– For information to be comparable, like things must look
alike and different things look different; uniformity can
make unlike things look alike
• Some degree of comparability can be
achieved by faithful representation
3
Comparability: Why?
• To meet the objective of financial reporting
– Provide financial information about the entity that is
useful to existing and potential investors, lenders and
other creditors in making decisions about providing
resources to the entity
• Decisions to buy, sell, or hold equity and debt
require allocation of capital, and financial
reporting is aimed at those who cannot
demand the information they need
• Thus, comparability in financial reporting
across entities and over time is important
4
Comparability: How?
• Vision for International Financial Reporting
Standards (IFRS)
…one single set of high
quality global standards...
...used on the global
capital markets.
5
Comparability: How?
• Global standards improve functioning of global
capital markets
• Increase
– Comparability
– Quality of information
• Decrease
– Costs of preparing financial statements
– Information risk and cost of capital
• Impossible to achieve comparability without
using the same set of standards
6
Comparability: How?
• Requirements in standards also matter
• Framework considers financial statement
elements (e.g., assets) item by item
– Aim is to provide investors with comparable information
about the entity’s assets and claims against those assets;
profit or loss is change in the assets and claims
• Comparability results from portraying those
elements in the same way
– Recognize the same (sub)set of assets and liabilities
– Measure them in the same way
7
Recognition
• Does recognizing same (sub)set of assets
and liabilities always achieve comparability?
– What if different assets and liabilities are important for
some firms versus others, e.g., knowledge-based
entities versus durable manufacturers versus insurers?
– What if some assets—e.g., intangibles—or particular
types of claims—e.g., claims with uncertain outcomes—
are omitted?
– Unrecognized assets and liabilities have direct
consequences for comparability of profit or loss because
profit or loss is changes in the amounts associated with
recognized assets and liabilities
8
Measurement
Same asset measured same way
• Does measuring same assets in same way
always achieve comparability?
– Modified historical cost?
– Same asset purchased at different times has different measure
– More differences emerge, e.g., if asset is impaired or is part of
fair value hedge
– Fair value?
– Price that would be obtained to sell and asset or transfer a
liability between market participants at the measurement date
– Has potential to achieve comparability
– A concern is effects of discretion in estimating fair value
– Something else? What?
9
Measurement
Same asset measured same way
• A, B, and C each own one share of common stock in Entity
Z. Acquisition cost is 20 for A, 40 for B, and 60 for C. The
current fair value is 45.
• Are the financial statements of A, B, and C comparable if
each measures its investment at cost?
• What if each measures its investment at fair value?
• What if each measures the investment at cost, and discloses
the fair value?
Example is from 2011 FASB/IASB Financial Reporting Issues Conference
10
Measurement
Different assets measured different ways
• Can we achieve comparability if we measure
different assets of the entity in different ways?
– Financial assets at fair value and property, plant and
equipment at modified historical cost?
– Impair accounts receivable for incurred credit losses,
property, plant and equipment to recoverable amount,
and inventory to lower of cost or fair value less costs to
sell?
– Long-term debt at amortized cost and derivative
liabilities at fair value?
– … (many measurement methods are used in financial
reporting today)
11
Measurement
Different assets measured different ways
A
B
500
500
Accounts receivable
1,000
1,000
Property, plant, and equipment
1,500
1,500
Total
3,000
3,000
Cash
• A: accounts receivable is measured at fair value and
property, plant, and equipment is measured at modified
historical cost. All in $US.
• B: all are measured at fair value. Cash is in $US, accounts
receivable is in Euros, and property, plant, and equipment is
in CHF.
• What do the 3,000 for A and B represent? Are they
comparable to each other? To anything?
Example is from 2011 FASB/IASB Financial Reporting Issues Conference
12
Measurement
Same asset measured different ways
• Can we achieve comparability if we measure
the same asset in different ways—either for
same entity or different entities?
– Computers as inventory versus equipment?
– Warranty obligations relating to sales of goods versus
insurance?
– Real estate as investment property versus property,
plant and equipment?
– Gain or loss on an item designated as hedged in a fair
value hedge, versus one that is not designated?
– Optional revaluation, fair value, hedge accounting…
13
Measurement
Same asset measured different ways
• A and B each buy a piece of construction equipment for
$200,000. A classifies equipment as inventory and B
classifies it as equipment.
• Six months later, both still own the equipment. C holds it in
inventory and B has depreciated it (it is available for use, but
has not been used).
• A and B dispose of the equipment for a gain. A displays the
gain as revenue and expense. B displays the gain net.
• In each case, are the financial statements of A and B
comparable?
Example is from 2011 FASB/IASB Financial Reporting Issues Conference
14
Measurement
Same asset measured different ways
• Bank A and Bank B each buy US Treasury securities at a
cost of $1 million. The fair value is $1.2 million.
– Bank A classifies the securities as trading (or fair value through
profit or loss) and recognizes $1.2 million in assets and a gain of
$0.2 million
– Bank B classifies the securities as held to maturity (or amortized
cost) and recognizes $1.0 million in assets and no gain or loss
• Are the financial statements of A and B comparable?
Example is from 2011 FASB/IASB Financial Reporting Issues Conference
15
Does “use” affect economics?
• A key question is whether two assets that
seem the same are economically the same if
they are used differently?
– If so, what are the differences that should be reflected in
the accounting?
• We have been doing this for a long time in
financial reporting without articulating why
• Does this notion also apply to financial assets
and liabilities?
– IFRS 13 Fair Value Measurement has concluded “no”
16
Does business model matter?
• Does different “use” depend on the entity’s
“business model”?
• Framework has no concepts about role of
business model in financial reporting
• What is a business model?
– What is the definition?
– Does business model differ from intent?
– Is an entity’s business model verifiable? Auditable?
• Why and how should business model or
intent affect financial reporting?
17
Comparability: What does research say?
• Global financial reporting with greater
comparability can be beneficial…
– To investors
– Lower costs of comparing cross-border investment opportunities
– Higher quality accounting information
– To firms
– Lower cost of capital
– Increase cross-border investing
• But, benefits are tempered by cross-country
differences in implementation, incentives,
and enforcement
18
Market Reaction to the Adoption of
IFRS in Europe
C.S. Armstrong, M.E. Barth, A.D. Jagolinzer
and E.J. Riedl
The Accounting Review 2010
19
IFRS adoption in Europe
• Motivating questions
– Did investors perceive net benefits to adoption of IFRS
in Europe?
– Comparability or increased quality?
• Research questions
– Did European market react positively (negatively) to
events that increased (decreased) likelihood of IFRS
adoption?
– Were there differences across firms depending on
information environment?
20
IFRS adoption in Europe
Reaction to the Adoption of IFRS in Europe – Individual Events
Event Date
Description
Predicted sign
Mar 12, 2002
European Parliament passes resolution requiring all EU listed companies to use IFRS by 2005
+
May 14, 2002
EFRAG issues draft recommendation to endorse all extant IFRS
+
June 19, 2002
EFRAG issues final recommendation to endorse all extant IFRS
+
July 4, 2003
Chirac sends letter to Prodi expressing concerns about IAS 39 and its potential negative effect
on Europe

July 9, 2003
Bolkestein sends letter to Tweedie supporting adoption
+
July 16, 2003
ECOFIN and ARC support adoption of IFRS
+
Sept 29, 2003
EC endorses all extant IFRS, except IAS 32 and IAS 39
+
Bolkestein pledges to postpone endorsement of IAS 32 and IAS 39 until issues are resolved;
sets up consultative group to facilitate resolution
+
Mar 30, 2004
HSBC announces intentions to implement IAS 39 in full
+
June 4, 2004
EFRAG issues draft recommendation to endorse IAS 32 and IAS 39
+
July 8, 2004
EFRAG issues final recommendation to endorse IAS 32 and IAS 39
+
Oct 1, 2004
ARC recommends endorsement of IAS 39, but recommends provisions relating to the fair
value option and portfolio hedging of demand deposits be carved out

Nov 19, 2004
EC endorses IAS 39 with both carve-out provisions

June 16, 2005
IASB issues revised IAS 39 with new fair value option
+
July 8, 2005
ARC recommends endorsement of revised fair value option, thereby eliminating one of the
carve-outs
+
Nov 15, 2005
EC endorses revised fair value option, thereby eliminating one of the carve-outs
+
Feb 3, 2004
21
IFRS adoption in Europe
• Overall positive reaction to IFRS adoption
 Investors perceive net benefits to adoption
• Incrementally positive for firms with lower
pre-adoption information quality and higher
information asymmetry; incrementally
negative in code law countries
 Investors perceive increased quality benefits, but
concerned about enforcement
• Positive for high information quality firms
 Investors perceive comparability benefits
22
Are International Accounting
Standards-based and US GAAPbased Accounting Amounts
Comparable?
M.E. Barth, W.R. Landsman, M. Lang,
and C. Williams
Journal of Accounting and Economics 2012
forthcoming
23
Comparability of IFRS and
US GAAP reporting
• Motivating questions
– Is comparability with US GAAP reporting higher after
IFRS firms adopt IFRS?
– Does comparability differ across firms or time?
• Research questions
– Are accounting system and value relevance
comparability higher after IFRS firms adopt IFRS?
– Are there differences for voluntary/mandatory adopters,
firms from common/code law and high/low enforcement
countries, and in more recent years?
– Are earnings smoothing, accrual quality, and timeliness
of earnings sources of increases in comparability?
24
Comparability of IFRS and
US GAAP reporting
• Research design
– Firms adopting IFRS from 1995 to 2006 and US firms
– IFRS firms from 27 countries
– Economic outcomes: stock price and stock return
– Accounting amounts: earnings and equity book value
– Accounting system comparability
– Difference between predicted economic outcomes resulting
from applying US GAAP and IFRS pricing multiples to each
firm’s accounting amounts
– Value relevance comparability
– Difference between explanatory powers of accounting amounts
for economic outcomes
– Metrics for earnings smoothing, accrual quality, and
timeliness of earnings from prior literature
25
Comparability of IFRS and
US GAAP reporting
• Findings
– Comparability higher after firms adopt IFRS
– Both types of comparability are higher for IFRS
– Firms that adopted IFRS mandatorily, firms from common law
legal origin and high enforcement countries, and in more
recent years
– US firms have higher value relevance, but value
relevance is comparable for firms from common law
and high enforcement countries
– Earnings smoothing, accrual quality, and earnings
timeliness all potential sources of comparability
26
Comparability: When?
• This is the big question
• Widespread IFRS adoption and more
consistency in implementation and
enforcement
– Most countries are now part of the IFRS family
– Last big holdout is the US
• Thus, there has been progress on using the
same standards dimension of comparability
– But, more needs to be done
– Need for all entities to apply all standards, word for word
27
Comparability: When?
• Need to ensure requirements in standards
achieve comparability
• Standard setting is slow and evolutionary
– Changing standards takes time, even if we all agree
– But, we do not. There are many unresolved questions
–
–
–
–
What are “like things”?
Does use of an asset change its economics?
What measurements should we use and why?
What information do investors need and, thus, should financial
statements portray?
• Need to be willing to accept change
28
A word about the US
• Pre 2001 US actively involved in IASC
• 2001 US played key role in setting up IASB
• 2007 non-US registrants can use IFRS
without reconciliation to US GAAP
– IFRS as issued by IASB—no modifications
• 2008 “Roadmap” for possible adoption of
single set of global standards
• 2010 confirmed commitment to single set of
standards and issued SEC staff “Work Plan”
29
A word about the US
• May 2011 “Exploring a Possible Method of
Incorporation”
– “Condorsement” framework
– Convergence: country maintains its local standards, but over time
modifies those standards to be more like IFRS
– Endorsement: involves incorporating individual IFRS into its
existing local standards
– Not fundamentally different from other countries’ processes
• We are awaiting the SEC’s next move
• Comparability is key to the SEC’s decision—it
is the main justification for moving to IFRS
30
Concluding remarks
• Comparability in financial reporting is key to
promoting efficient allocation of capital
• Adoption and consistent implementation of
IFRS is crucial, necessary first step
• Often overlooked second necessary step is
need to improve the requirements in the
standards to truly achieve comparability
• Progress in last ten years was breathtaking
• We can do better, but we are getting closer!!
31
Thank you!
32