Financial Statement Relevance, Representational Faithfulness, and Comparability

Abstract

One approach to achieving comparable financial statements is to adhere to identical (or converged) standards, methods, models, and estimates. However, adherence to identical standards, methods, models, and estimates is impractical and contrary to current trends in standard setting. As an alternative, the FASB has proposed that satisfying the fundamental characteristics of relevance and representational faithfulness should result in higher comparability. Under this assumption, a focus on increasing the quality of the financial information that is generated by firms would be an effective means of improving comparability in financial reporting. We inquire whether this proposition is reflected in the practices of U.S. firms. Our analysis corroborates the intuition of the FASB and the notion that distinct characteristics of financial information influence accounting comparability. Our results also suggest that accounting principles can enhance comparability by encouraging high-quality valuations across diverse asset and liability classes on balance sheets and high-quality estimates of operating performance in income statements.

Keywords: FASB, Comparability, Relevance, Representational Faithfulness

JEL Classification: M4