A company’s per share earnings increase by $0.40 as a result of changes in its pension plan’s actuarial assumptions. Is the company’s quality of earnings affected? If a bank’s loan portfolio exhibits an increasing trend of loans that stopped paying interest, has the quality of the bank’s earnings deteriorated? Does a company’s susceptibility to substantial changes in commodity prices affect its earnings quality? Is a substantial difference between reported stockholder earnings and earnings reported for tax purposes a signal of good or poor quality earnings?
Earnings quality is an elusive concept; in many cases, it is still a matter of subjective determination. The author’s survey of accountants, security analysts and financial managers, however, provides some indication of how financial statement preparers and users view earnings quality. The results offer some useful guidelines for distinguishing between good and poor quality of earnings.