SASB Level 1 Basic Stuff 150 Questions with 100% Complete Solutions/Verified Investors use sustainability information to: - Correct Answers • IMPROVE FINANCIAL PERFORMANCE: improve their ability to achieve abovemarket returns; • HEDGE AGAINST RISK: reduce risk and volatility, and protect against diminished returns; and • ADVANCE SUSTAINABILITY: improve environmental and social investment outcomes, with financial returns as an equivalent or a secondary consideration.What impact does sustainability information have on price volatility? - Correct Answers It is a strong signal for price volatility. Companies with higher sustainability or ESG ratings have lower price and earnings per share (EPS) volatility than those with low sustainability performance scores. Notably, the researchers found that sustainability information was the only reliable signal for predicting EPS volatility, providing better insight than traditional measures such as return on equity (ROE).Do companies with above-average ESG scores avoid major losses more than others? - Correct Answers Yes What are the benefits of sustainability info to private equity? - Correct Answers Improve portfolio performance, mitigate risk, and generate alpha (the excess return of an investment relative to the return of a benchmark index.).Why do companies internally demand sustainability information? - Correct Answers Sustainability data can help provide insight into financial performance and contribute to success in the near, medium, and long term. It also can reduce cost of capital.What institutions (not internal or investors) demand sustainability information? - Correct Answers 1.Policy-based initiatives (such as the Action Plan for Financial Sustainable Growth)
- Nations
- Non-policy efforts (such as guidance from stock exchanges)
4. Industry Groups: (Accountancy Europe, Global Asset
Owner Forum, Global Financial Markets Association) What prompted the development of financial information systems? - Correct Answers The Great Depression 1 / 3
What major regulatory reform followed the Great Depression? - Correct Answers The establishment of the US Securities and Exchange Commission (US SEC) in 1934 The legislative history of the formation of the US SEC demonstrates two equally important purposes
for the US SEC's existence: - Correct Answers 1. to protect investors, and
- to influence corporate behavior
Why is materiality important to financial disclosures? - Correct Answers The concept of materiality provides a framework through which companies can differentiate information that should be disclosed from that which is not necessary to disclose. The concept of materiality also helps regulators determine whether enforcement action is appropriate for false, misleading, or incomplete disclosures and helps courts make final decisions in cases of disclosure-based litigation.How does the US Supreme Court define materiality? - Correct Answers information is material if its exclusion would have altered the "total mix" of information considered by a reasonable investor. The total-mix concept suggests that material information is not defined by whether or not it would have changed an investor's decision. Rather, information is deemed to be material if it is significantly likely to be considered by a reasonable investor in investment decisions—a higher threshold than if it "might" be considered— by such an investor. In a subsequent case, the US Supreme Court expanded on the definition of "materiality" by indicating that materiality can be assessed by the probability that an event may take place and the magnitude of impact of the event on the company.How did the Supreme Court use a probability and magnitude test to assess materiality? - Correct Answers According to this test, the determination of materiality should also consider the probability that an event will happen and the magnitude of the occurrence of the event. For example, a relatively small transaction for the company, or one that involves a small price premium, will not likely meet the probability and magnitude test for materiality.What is GAAP? - Correct Answers Generally Accepted Accounting Principles What is historical cost accounting? - Correct Answers Measurement of an assets value as the actual cost paid for the asset at the time of purchase. Under this accuracy-focused approach, the original nominal value is reported on the balance sheet even if the value of the asset changes over time.Explain the conflict around standardization in accounting, specifically around the mid-19th century? - Correct Answers On the one hand, non-standardized accounting practices cater to the needs of more reporting companies, in that companies can disclose information in the manner they feel best represents their business. On the other hand, the fragmentation that exists in the absence of 2 / 3
standardization reduces the usefulness of disclosed information in the market. The higher the variation of disclosure, the less comparable, decision-useful, and actionable the information becomes to investors, creditors, and lenders Explain the shift from strict historical asset valuation to decision usefulness in the 1960s - Correct Answers Accounting measurements were recast to serve a specific purpose (to inform decisions) rather than to perform a singular function (to provide accurate measurement). In other words, the accounting profession recognized the importance of providing forward-looking information rather than just historical accuracy What is the IFRS? - Correct Answers The International Accounting Standards Board (IASB) is an independent standard-setting organization with robust governance and due process. Today, IASB oversees the development of the International Financial Reporting Standards (IFRS Standards), the goal of which is to "develop, in the public interest, a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles.What is FASB? - Correct Answers One month after the IASC was formed, the Financial Accounting Standards Board (FASB) was established in the US to replace the APB. The FASB emerged to serve as an independent, full-time organization dedicated to the development of financial accounting standards Why do companies report information not required by GAAP? - Correct Answers Historically, companies use non-GAAP reporting to supplement core financial statements and highlight information not required by standardized disclosure, such as a change in operating structure or the impacts of a merger or acquisition.What are some examples of non-GAAP reporting? - Correct Answers Earnings before interest, taxes, depreciation, and amortization (EBITDA), changes in operating structure, the impacts of a merger or acquisition, and adjusted earnings (when the company believes an adjusted metric provides a better understanding of the business to investors) What are intangible assets? - Correct Answers Intellectual capital, customer relationships, brand value, and other "soft" assets.
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