Medico has been spending a fair amount on its medical research and development activities compared to the industry benchmark. Due to the COVID-19 pandemic, the company increased its research expenditures significantly in 2020. The company has capitalised over 60% of the expenditure and wrote off the balance to the income statement. The auditors recommended writing off the total amount as expenses, which will significantly reduce net profits. Medico has not provided sufficient disclosure on the issue.

Question A2 Earnings quality and reporting quality are the two elements of the quality spectrum. Explain each of the scenarios outlined below in the context of the quality spectrum