Skip to content

CFA Level I · CFA Level I Exam · Financial Reporting Quality

A company reports net income of 80 million. Its non-IFRS "adjusted earnings" add back a 30 million impairment charge and a 12 million litigation cost, and deduct a 9 million one-time gain on asset sale. Ignoring taxes, the impairment is genuinely non-recurring, but the litigation cost is the third such charge in four years. If the analyst also reverses the litigation add-back, adjusted earnings are closest to:

Adjusted earnings are about 101 million. Starting from 80 million, add the 30 million impairment and deduct the 9 million gain, giving 101 million. The recurring litigation cost should not be added back, so the company's 113 million is overstated.

  1. A101 millionCorrect
  2. B113 million
  3. C131 million

Explanation

Company adjusted earnings = 80 + 30 + 12 - 9 = 113. Treating the litigation cost as recurring removes the 12 add-back: 113 - 12 = 101. The 113 figure is the company's own number, and 131 results from wrongly adding the gain instead of deducting it, then keeping all items (80+30+12+9).

Did you get it right without looking?

One question tells you little. A timed set on Financial Reporting Quality shows your real accuracy, how long you take and where you lose marks.

Practise Financial Reporting QualityFree diagnostic mock

More Financial Reporting Quality questions