The main objective of financial statements is to provide information that is useful to a wide range of users for the purpose of making economic decisions. Therefore, it is important that the activities and events of the entity, as expressed within the financial statements, are understood by users, meaning that their usefulness and relevance is maximized. This can present management with a problem because clearly not all users have the same (financial) abilities and knowledge. For understandability, management are allowed to assume users do have a reasonable knowledge of accounting and business and are prepared to study the financial statements diligently. Importantly, this characteristic cannot be used by management to avoid disclosing complex information that may be relevant in user decision-making.

However, management must recognize that too much or overly complex disclosure can obscure the more important aspects of an entity’s performance, i.e., important information should not be ‘buried’ in the detail of unfathomable information. Comparability is the main tool by which users can assess the performance of an entity. This can be done through trend analysis of the same entity’s financial statements over time (say five years), or by comparing one entity with other (suitable) entities (or business sector averages) for the same time period. This means that the measurement and disclosure (classification) of like transactions should be consistent over time for the same entity, and (ideally) between different entities. Consistency and comparability are facilitated by the existence and disclosure of accounting policies.

The above illustrates the close correlation between comparability and consistency. However, it is not always possible for an entity to apply the same accounting policies every year; sometimes they have to change (e.g., because of a new accounting standard or a change in legislation). Similarly, it is not practical for accounting standards to require all entities to adopt the same accounting policies. Thus, if an entity does change an accounting policy, this breaks the principle of consistency. In such circumstances, IFRSs normally require that any reported comparatives (previous year’s financial statements) are restated as if the new policy had been in force when those statements were originally reported. In this way, although there has been a change of policy, comparability has been maintained.

It is more difficult to address the issue of consistency across entities; as already stated, accounting standards cannot prescribe the use of the same policy for all entities (this would be uniformity). However, accounting standards do prohibit certain accounting treatments (considered inappropriate or inferior) and they do require entities to disclose their accounting policies, such that users become aware of differences between entities, and this may allow them to make value adjustments when comparing entities using different policies.