WHat is difference?
I thought behavior of a managmnt putting his recurring or operating expense (gain) into non-recurring or non-operating in order to show earning better was the lower earning quality but curriculum book exhitbit 4. Accounting Warning sign in "2.1 quality of financial reprot"said
- Classifying non-operating income or gains as part of operations
- Classifying ordinary expenses as non-recurring or non-operating
So, now i am confused… whether earning quality or reporting quality deterioration is up to intention of the managemnet or anything else ?
Reporting quality - each accounting (managament) policy which is GAAP compliant and results in full faithful
presentation of assets, liabilities and equity positions as well as non doubtful operating results in a given period. Whoever uses the data from such financial report can bring a reliable decision. Earnings quality - related to sustainability of earnings. (Eg.) an entity may sell office buliding within period and show extra profit. Since it cannot repeat such profit in further period and if this sale has significiant impact on earnings in current period (eg. 80 % of earnings, or entity even wouldn’t reach break even), we cannot conclude that such earnings are quality. If management’s decission was to show such earnings as recurrent and operational and/or has not even disclosed selling of office buliding in FS notes, we may talk about misreporting so it would be non-GAAP compliant bad reporting quality.
Wow you answer is as brilliant as the light of flashback
THanks sir!(or Madam)