CFA Level I · CFA Level I Exam · Financial Reporting Quality
Which of the following is the most likely warning sign of low-quality financial reporting related to a company's use of non-IFRS measures?
Frequent changes in the definition that always raise reported results are the warning sign. They suggest management is choosing adjustments to flatter performance, and they undermine comparability over time, whereas consistent definitions and showing IFRS profit alongside are good practice.
- AConsistent definitions of the measure across periods
- BFrequent changes in the definition of the measure that always raise reported resultsCorrect
- CPresentation of the measure alongside the IFRS profit figure
Explanation
Redefining a measure in ways that consistently improve results suggests management is shaping the message rather than informing users, and it hurts comparability. Consistent definitions and equal prominence with IFRS figures are signs of good practice.
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