SASB LEVEL 1 BASIC STUFF EXAM
QUESTIONS AND ANSWERS
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 is exclusionary screening in investing? What other ways can investors use
sustainability info? - Correct Answers -Avoiding objectionable or low-performing
investments such as weapons manufacturers or tobacco companies. Investors can also
use this info to make decisions about which investments to prioritize or actively select
What is socially responsible investing (SRI)? - Correct Answers -SRI practices often
entailed (and in many cases still entail today) excluding those investments affiliated with
certain geographic conflicts (such as apartheid in South Africa) or operating in "sin
stock" industries such as weapons, gambling, alcohol, or tobacco
What is a values-based screen? - Correct Answers -Values-based screens aim to avoid
investments based on the beliefs or ethical standards of the investors. This may be
different for each investor
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)
2. Nations
3. 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
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
2. 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 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
QUESTIONS AND ANSWERS
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 is exclusionary screening in investing? What other ways can investors use
sustainability info? - Correct Answers -Avoiding objectionable or low-performing
investments such as weapons manufacturers or tobacco companies. Investors can also
use this info to make decisions about which investments to prioritize or actively select
What is socially responsible investing (SRI)? - Correct Answers -SRI practices often
entailed (and in many cases still entail today) excluding those investments affiliated with
certain geographic conflicts (such as apartheid in South Africa) or operating in "sin
stock" industries such as weapons, gambling, alcohol, or tobacco
What is a values-based screen? - Correct Answers -Values-based screens aim to avoid
investments based on the beliefs or ethical standards of the investors. This may be
different for each investor
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)
2. Nations
3. 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
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
2. 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 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
