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?

Question

BlackTom AI · Accepted Answer

When evaluating why cross-industry comparisons of financial information can be problematic, we must examine each statement carefully and in context.
Option A: '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 in many accounting frameworks where measurement bases vary, leading to different reported amounts depending on whether cost, fair value, or other bases are used. Such discretion can hinder direct comparability across industries with different asset compositions and valuation needs.
Option B: '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 statement highlights a real issue: IFRS recognition rules often restrict internal development costs from being capitalized as intangible assets, whereas some industries (like professional services) rely more on intangible assets such as expertise, brand, or client relationships. This differential treatment affects comparability between industries with varying reliance on internally generated intangibles.
Option C: 'A. and B.' This option asserts that both of the above points are true as contributing factors to the difficulty of cross-industry comparison, which aligns with the reasoning in Options A and B. Recognizing both discretionary measurement and limitations on recognizing internally generated intangibles helps explain why comparing a professional services firm with a manufacturing firm is problematic.
Option D: 'Neither of the above' would be incorrect because both A and B identify legitimate causes of comparability issues across industries, and saying neither would ignore those real considerations.
In summary, Option A correctly notes measurement discretion, Option B correctly notes IFRS recognition limits for intangibles in some industries, Option C accurately combines these two valid points, and Option D incorrectly dismisses the issues raised in A and B.

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