CFA Level I · CFA Level I Exam · Financial Reporting Quality
A company's financial reports comply with IFRS and are free of material misstatement, but earnings are driven by a one-time gain that is unlikely to recur. The reports are best described as having:
The reports have high financial reporting quality but low earnings quality. Compliance with IFRS and absence of misstatement make the reporting decision-useful, while earnings that depend on a non-recurring gain are not sustainable and therefore are of low quality.
- Alow financial reporting quality and low earnings quality
- Bhigh financial reporting quality and low earnings qualityCorrect
- Clow financial reporting quality and high earnings quality
Explanation
Reporting quality concerns whether disclosures are decision-useful and faithful, which holds here. Earnings quality concerns whether results are sustainable and adequate, and a one-time gain makes earnings low quality.
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