CFA Level I · CFA Level I Exam · Analyzing Income Statements
An analyst is forecasting next year's earnings for a company that reported a large restructuring charge within operating income this year. The analyst believes the restructuring is unusual and unlikely to repeat. The most appropriate treatment is to:
The analyst should exclude the restructuring charge from the earnings base used for forecasting, because it is judged unusual and unlikely to repeat. Including it as recurring would understate sustainable earnings. The analyst should still check whether similar charges appear repeatedly, which would argue against excluding them.
- AExclude the charge from the earnings base used for forecastingCorrect
- BInclude the charge in full as a recurring cost
- CTriple the charge to reflect future restructurings
Explanation
Items judged unusual and infrequent should be removed from the earnings base when forecasting persistent earnings. Treating them as recurring would understate future earnings. The analyst should still check whether such charges have recurred in prior years.
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