Question

Under the United States Generally Accepted Accounting Standards (U.S. GAAP), property, plant and Equipment are reported at historical cost net of accumulated depreciation. These assets are written down to fair value when it is determined that they have been impaired.

Several other countries, including Australia, Brazil,England, Mexico and Singapore, permit the revaluation of property, plant and equipment to their current cost as of the balance sheet date. The primary argument in favor of revaluation is that the historical cost of assets purchased ten, twenty, or more years ago is not meaningful. A primary argument against revaluation is the lack of objectivity in arriving at current cost estimates,particularly for old assets that either will or cannot be replaced with similar assets or for which there are no comparable or similar assets currently available for purchase.

Required:1) List and discuss the 5 qualitative concept of comparability. In your opinion, would the financial statements of companies operating in one of the foreign countries listed above be comparable to a U. S. company’s financial statements? Explain.

Answer 1

Answer:

Answer: 1 Concept of comparability:

Comparability is the level of standardization of accounting information that allows the financial statement of multiple organisation to be compared to each other.

Comparability is one of the key qualities which accounting information must possess. Accounting information is comparable when accounting standards and policies are applied consistently from one period to another and from one region to another.

Comparative financial statements are the complete set of financial statement that an entity issues, revealing information for more than one reporting period. The financial statement that may be included that:- The income statement, The balance sheet, The statement of cash flow.

Another variation on the comparative concept is to report information for each of the 12 preceding months on a rolling basis. Reasons:

• Provides a comparison of an entity's financial performance over multiple periods, so that you can determine trends. The statement may also reveal unusual spikes in the reported information that can indicate the presence of accounting errors.
• Provides a comparison of expenses to revenues and the proportions of various item on the balance sheet over multiple periods. This information can be useful for cost management purpose.
• May be useful for predicting future performance, though you should rely more on operational indicators and leading indicators than on historical performance for the analysis.

It is necessary to establish such a concept:

1. Communication concerning comparability can be meaningful.
2. The relation of comparability to investment decisions can be fully established.
3. Comparability can be fully evaluated as a desirable or undesirable aspect of financial reporting.
4. The present state of comparability in financial reporting can be determined.
5. The probability of achieving comparability can be evaluated.
6. The procedures for achieving comparability can be established.

Answer: 2 would the financial statement of companies operating in one of the foreign countries listed above be comparable to a U.S. company's financial statements:   

US GAAP and the international standards or IFRS have many standards in common, but they also disagree on many common accounting practices. For instance, US GAAP allows for a different method of accounting for pension programs. This means that a US based company like GM won't use the same accounting methods as a foreign based company like Toyota.

These two company pension liabilities and pension funding will be reported differently. This means the two companies are not comparable in this respect. Luckily, most foreign companies still report their statement on US exchanges using GAAP, although this is likely to change in the future as IFRS is more widely adopted.

Currency is another form of comparability. Financial statement presented in difference currencies can't be compared at face value. They must be converted into the same currency in order to be compared meaningfully.