It is problematic to compare two firms that operate in very different industries (e.g., a professional services firm and a manufacturing firm) based on their reported financial information as firms rely on different economic resources and have different obligations towards various stakeholders. Why can firms in different industries not be compared?

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BlackTom AI · Accepted Answer

The question asks why firms in different industries cannot be fairly compared using their reported financial information.
Option A says: 'Firms have a large degree of discretion in accounting for certain assets and liabilities in that they can choose between different measurement bases (cost, fair value etc.)' This is true. Accounting standards provide choices in measurement bases for some assets and liabilities, which can lead to meaningful differences in reported numbers depending on the bases selected. Such discretion reduces comparability across firms that operate in different sectors with different asset profiles.
Option B says: 'Accounting standards such as IFRS do not permit the recognition of certain internally generated intangible resources, and some industries rely more on such resources (professional services) than others (manufacturing)' This is also true. Internally generated intangibles (like brand value, knowledge, or proprietary processes) may be recognized differently or not at all under IFRS, and industries such as professional services rely more on these assets than manufacturing, leading to further differences in reported metrics and comparability challenges.
Option C states: 'A. and B.' Combining the two points, both sources of non-comparability are present: measurement discretion and differences in recognition of intangibles. Since each factor contributes to cross-industry comparability issues, their combination provides a robust explanation for why comparisons across industries are problematic.
Option D says: 'Neither of the above' which is incorrect because both A and B identify valid sources of comparability issues; rejecting both would ignore legitimate reasons.
In summary, the validity of A and the validity of B together explain why comparing firms in very different industries using reported financial information can be misleading or inappropriate, because differences arise from measurement choices and from how intangible resources are recognized.

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