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

An analyst reviewing a manufacturer's annual report notices that the company's press release highlights an "adjusted operating profit" that excludes restructuring costs, even though similar costs have been incurred in each of the last four years. The analyst's most appropriate conclusion is that the adjusted measure:

The adjusted measure may overstate sustainable earnings. Restructuring costs that appear every year are effectively recurring operating costs, so excluding them flatters profitability and reduces the usefulness of the measure for forecasting future earnings.

  1. Ais more reliable than IFRS operating profit because it removes noise
  2. Bmay overstate sustainable earnings because the excluded costs recurCorrect
  3. Cis acceptable because non-IFRS measures are prohibited from including such items

Explanation

Costs that recur every year are part of normal operations, so excluding them inflates the picture of sustainable earnings. The first option ignores the recurrence. The third option misstates the rules, since non-IFRS measures are allowed with disclosure and reconciliation.

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