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Financial statement relevance, representational faithfulness, and comparability

Author

Listed:
  • Michael Neel

    (University of North Texas)

  • Irfan Safdar

    (Widener University)

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.

Suggested Citation

  • Michael Neel & Irfan Safdar, 2024. "Financial statement relevance, representational faithfulness, and comparability," Review of Quantitative Finance and Accounting, Springer, vol. 62(1), pages 309-339, January.
    • Handle: RePEc:kap:rqfnac:v:62:y:2024:i:1:d:10.1007_s11156-023-01205-9
    DOI: 10.1007/s11156-023-01205-9
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    Cited by:

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    More about this item

    Keywords

    FASB; Comparability; Relevance; Representational faithfulness;
    All these keywords.

    JEL classification:

    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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