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

Management of a company repeatedly reports adjusted earnings that exclude 'one-time' restructuring charges that have occurred in each of the last five years. An analyst would most appropriately conclude that this practice:

The practice reflects a reporting bias that overstates sustainable earnings. Restructuring charges recurring for five years are part of ongoing operations, so excluding them as one-time items inflates adjusted earnings and reduces their usefulness for forecasting; IFRS does not require this adjustment.

  1. Aimproves comparability because restructuring is nonrecurring
  2. Breflects a reporting bias that overstates sustainable earningsCorrect
  3. Cis required under IFRS to separate core from noncore items

Explanation

Charges recurring every year are effectively part of normal operations. Excluding them biases adjusted earnings upward and overstates sustainable earnings. IFRS does not require such adjusted measures, and the charges are not truly nonrecurring.

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