Consider the problem of accounting for research and development outlays, an early project and pronouncement of the FASB. FAS No. 2 (FASB 1974) was issued a year after it was established. Consider two companies: Company A that spends $1 million on R&D and manages to get a patent of doubtful value; and Company B that also spends $1 million on R&D and manages to develop a patent whose market value is estimated by the firm to be $10 million. Consider two possible standards: X that allows firms to capitalize that part of the R&D cost that does not exceed the firm's estimate of the value of the R&D; and Y mat requires the firm to treat all R&D outlays as expense when incurred.
Under Standard X, Company A could capitalize an amount between 0 and $1 million depending on what it claims to be the value of the future benefits of the R&D project. Company B also could do the same, although it will likely capitalize the entire cost of $1 million. In any case, to the user of the statements the two companies could look the same when their underlying states are entirely different. This is the problem that led the FASB to issue its FAS No. 2 in 1974 (labeled Y in this discussion).
Under Standard Y, both firms must expense the $1 million outlay against the current period income, and their balance sheets and income statement for the year would be identical (other things being the same) when, in fact, their underlying economic situations are quite different. They are comparable in the sense that they both spent the same amount of money on R&D during the year, and both show this entire amount as a charge against current income. They are also comparable in the sense that they have no resulting assets on their balance sheets. However, they are not comparable in the sense that while Standard Y (the current method) reveals the economic situation of Company A in its financial statements quite accurately, it misleads the user about the valuable resource of a patent Company B has but does not show on its balance sheet. So, even in this simplest of accounting examples, it is not clear which of these two possible standards is of higher quality and which one results in financial statements that are more comparable-an attribute so highly valued in the Accounting Consensus and yet hard to define.