FSA: Evaluating Quality of Financial Reports

Optimal leverage is a characteristic of?

High-Quality Balance Sheet

Adequate liquidity is a characteristic of?

High-Quality Balance Sheet

Optimal Asset Allocation is a characteristic of?

High-Quality Balance Sheet

What are the indicators of High Financial Reporting Quality

Completeness (Represents all company assets and liabilities)

Unbiased Measurement (crucoal for asset and liability valuation)

What is Clear Presentation of High Financial Reporting Quality?

They represent economic reality closely

Accounting standards (but companies do have discretion)

In terms of Financial Reporting Quality, why might a company choose to make the adjustment consolidating two operations?

For Completeness, i.e. presenting them within one figure, it might also be to make some of their ratio look better i.e. D/E

In terms of Financial Reporting Quality, why might a company choose to make the adjustment seperating their liability, shown as net liability, into the two distinct areas of net pension liability and pension obligation??

To provide Clear Presentation of the information regarding their Liabilities

Why does an Auditor’s Opinion have limited usefulness?

Multiple reasons i.e. conflicts of interest, or auditor is inadequate, or otherwise

What is the mnemonic trigger for IFRS Management Commentary

SCOF - Strategic, Commerical, Operational, and Financial Risks

Before acting on any third-party source, what is it good to keep in mind?

Would reliance on this source be reasonable? i.e. bias information, background, history, etc.

What is Real Earnings Management?

Whilst not illegal, REM reduces quality of earnings (because it’s not sustainable) by doing things like reducing discretionary expenses

What is Accounting Earnings Management?

Change of methods & estimates, not necessary a bad thing on it’s own but has potential to be so depending on it’s situation

Wha tis high-quality reporting quality?

Information that is useful, relevant, and adheres to accounting standards

What is high-quality earnings quality?

Provides an adequate level of return and are sustinable

What’s my mnemonic device for High Quality Earnings Reporting

SEAR - Sustainable Earnings, Adequate, Results

Is Low Reporting and Earnings Quality non-compliant or compliant with US GAAP or IFRS?

Possibly - requires additional information

When you see a change to methods or estimates, i.e. capitalising expenditures that are traditionally expensed, what should I think?

Accounting earnings management

What’s the null hypothesis for the Beneish Model?

Company is not manipulating Financial Statements, M-score <= -1.78

What’s the alternative hypothesis for the Beneish Model?

Company is manipulating Financial Statements, M-score M> -1.78

What does a smaller negative or positive M-score mean?

Bad sign, higher likelihood of earnings manipulation

What does a larger negative M-score mean?

Good sign, likely no earnings manipulation

What does the Altman Model do?

Predict P(Backruptcy), based on liquidity, profitability, activity, and leverage