Page 30 - FINAL CFA I SLIDES JUNE 2019 DAY 9
P. 30
Session Unit 9:
32. Financial Reporting Quality, p.305
LOS 32.a: Distinguish between financial reporting quality and quality of reported results (including
quality of earnings, cash flow, and balance sheet items)., p.305
Financial reporting quality refers to the characteristics of a firm’s financial statements; primary -but not
the only criteria, is adherence to ‘jurisdiction’ GAAP or IFRS.
Others criteria: • Decision-useful
• relevance –materiality
• tanties
faithful presentation –completeness, neutrality!
The quality of earnings (not the quality of earnings reports) = sustainability of earnings (% of reported
earnings that can be expected to continue in the future)
• Income statement: Foreign exchange gains? Gains from disposals?
• Cash flow and balance sheet: inadequate accruals for probable liabilities and
overstatement of asset values?
• How about gains from increases efficiency or market share? Which is better?
Reported earnings may be GAAP-compliant and relevant, represent the company’s economic activities
faithfully, and be decision useful as a result, but have low sustainability or be low enough in amount that the
provision of adequate investor returns or the sustainability of the company itself are called into question.
