Per SFAS 8 issued by the FASB, page 19, QC23:
"Comparability is not uniformity. For information to be comparable, like things must look alike and different things must look different. Comparability of financial information is not enhanced by making unlike things look alike any more than it is enhanced by making like things look different."
A form is uniformity. Financial statements are not forms. And while financial statements are not forms, they are likewise not random either.
I put together a little presentation about the comparability of financial reports for something and figured that I would share it. If you don't want to read through that entire presentation, I provide the cliff notes here in this blog post but the entire presentation is worth watching.
First, it is important to understand what the FASB means by "comparability (including consistency)". That is explained in SFAS 8 which is referenced above. Here is the pertinent section of that document: (from page 19). This is well stated, very clear, and every word is worth reading:
- QC20. Users' decisions involve choosing between alternatives, for example, selling or holding an investment, or investing in one reporting entity or another. Consequently, information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date.
- QC21. Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. Unlike the other qualitative characteristics, comparability does not relate to a single item. A comparison requires at least two items.
- QC22. Consistency, although related to comparability, is not the same. Consistency refers to the use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities. Comparability is the goal; consistency helps to achieve that goal.
- QC23. Comparability is not uniformity. For information to be comparable, like things must look alike and different things must look different. Comparability of financial information is not enhanced by making unlike things look alike any more than it is enhanced by making like things look different.
- QC24. Some degree of comparability is likely to be attained by satisfying the fundamental qualitative characteristics. A faithful representation of a relevant economic phenomenon should naturally possess some degree of comparability with a faithful representation of a similar relevant economic phenomenon by another reporting entity.
- QC25. Although a single economic phenomenon can be faithfully represented in multiple ways, permitting alternative accounting methods for the same economic phenomenon diminishes comparability.
US GAAP is an excellent financial reporting scheme because it strikes a good balance between the ability to compare and the ability accurately report the financial condition and financial position of an economic entity. When trying to implement "comparisons" in software, it is very important to understand the goal of comparability the financial reporting scheme enables.
The first key idea one needs to understand is the difference between a "concept" and a "preferred label for a concept". For example, if you see "Revenue" in a financial report, the reporting entity might mean "Operating revenue" or they might mean "Operating and nonoperating revenue" or perhaps even something else. So while the label might say "Revenue", the concept they are reporting could be "Operating revenue" or maybe "Nonoperating revenue". And the first step needed to understand the differences between concepts is to get a list of those concepts.
After that, you can look at how different reporting entities use those concepts. Theoretically, if you are working with one specific industry group and the economic entities in that industry group all use the same reporting style, then you CAN think of that specific set of financial reports as a "form". One of the most consistent reporting styles of public companies is that which is used by those that report using the "interest-based revenues" approach. i.e. banks.
If you go to this web page and grab the Excel spreadsheet with the link "Compare All Excel Code (ZIP)" and then run the algorithm (click the button), the algorithm goes and grabs the fundamental financial information from the balance sheet, income statement, cash flow statement, and statement of comprehensive income for 535 financial institutions that use an interest-based revenues style of reporting. (Takes about 15 minutes to get all that information).
The information is very consistent. For the 535 entities there are about 50 concepts. 535 times 50 equals a total of 26,750 facts that the Excel macro looks for. There are about 120 inconsistencies. 120 inconsistencies divided by 26,750 facts equals an inconsistency rate of .44% (less than 1%), or an accuracy rate of 99.55%. Not bad quality.
But what if you wanted to use that same Excel algorithm to analyze a regulated public utility. How good would that algorithm be? Not as good because the reporting styles of banks and regulated public utilities is different.
What if you created a different algorithm for regulated public utilities and ran that against companies that were regulated public utilities. The success rate would likely be better.
But then, what if you wanted to COMPARE a bank and a regulated public utility for some reason. How would that work? Well, you would have to map the reporting style of a regulated public utility to the reporting style of a bank that used interest-based revenues style of reporting. That requires judgement.
So what is the point? Here you go:
- Financial reports are not "uniform" or forms. But when you compare economic entities that use the same reporting style, you can treat the information more like a form.
- When you cross reporting styles, comparisons are possible but require judgement.
- If you want to see how to compare, all the moving pieces, go look at the code of that Excel spreadsheet I referenced above.
- Automating comparisons using machines such as computers takes metadata, you have to document the patterns and then explain those patterns to the software.