Comparative Financial Statements and Accounting Standards
Financial reporting standards require that comparative financial statements are prepared showing comparative figures for the previous accounting period. Normally, such comparative figures would be required not only in the main financial statements but also in the notes to the financial statements. For most figures in the accounts, this will enable the users to examine trends in various categories of income and expenses.
Comparative financial statements are very useful for potential investors in a company and can reveal much useful information about a company's activities to a careful investor who is interested in studying the financial position of the company in which an investment is to be made. For example, the provision of comparative figures enables the investor to look at movements in various accounting ratios from one period to another, which may reveal important information about the company's liquidity and profitability. Any unusual or atypical figures in the latest financial statements will become clearer through the provision of comparative figures for the previous period.
The need to provide comparative figures may make it more difficult for a company to improve the appearance of its accounts in any particular period by "window dressing" them, making last minute adjustments to make the balance sheet look stronger than is actually the case.
Where certain amounts in the previous period are not directly comparable to the figures in the period under review, financial reporting standards would require suitable adjustments to be made, and the details of these adjustments and the reasons for making them would be disclosed in notes to the financial statements. For reasons of clarity and to avoid misleading or confusing comparisons, some comparative figures in the financial statements may not be required. For example, comparative figures in relation to additions to and disposals of fixed assets, transfers to and from reserves or details of shareholdings in subsidiaries or other undertakings would not necessarily be useful to the person reading the comparative financial statements and some financial reporting standards, therefore, permit them to be omitted. This enables investors and other users to understand the position as clearly as possible.
A comparative figure might also be omitted where company law requirements in the previous period exempted the figure from the disclosure requirements, but it is no longer exempt in the current period. This could apply for example to some of the figures that are disclosed in notes to the financial statements and is a point for preparers of comparative financial statements to bear in mind. In looking at how to do a comparative financial statement, those preparing such statements should carefully examine the applicable company law and financial reporting standards before they begin the task and they should establish which comparative figures are required and which may be omitted.