earnings quality

There are some confusion: 1. persistence and sustainability (Reading 26) 2. conservatism (Reading 27) so which way shall we go in exam?

The goal of earnings quality IS NOT conservatism! Persistence and sustainability is the right answer.

The reason conservatism is not a good goal for EQ is because earnings under conservatism tends to reverse in later period. So this leaves us with persistence and sustainability.

Have you read P315 of CFAI book, reading 27?

Another point against conservatism is when it goes to extremes… eg If a company takes massive accruals for potential losses – basically they are just storing away future releases.

… Don’t think I’ve seen a test q (CFAi or Schweser) that had a firm being “too conservative” so I’m not sure I get your point mcf… I mean this is cfai we are talking about… I doubt those guys even jaywalk