|
Stanadard
& Poor's (S&P) has gone and done it. The credit rating agency,
whose stock indices are widely used for benchmarking the value
of equities and is, therefore, in a position to influence
investor and corporate behaviour, has redefined operating
earnings and has, among other things, urged that employee
stock options be treated by companies in the US as a quarterly
expense against earnings.
This
suggestion has been made by S&P in a paper titled 'Measures
of corporate earnings' released in the US, which, according
to a press statement issued by the rating agency, "completes
a process S&P began in August, 2001, when the firm began discussions
with securities and accounting analysts, portfolio managers,
academic research groups and others to build a consensus for
changes that will reduce investor frustration and confusion
over growing differences in the reporting of corporate earnings".
It may
be recalled that the computation of core earnings, especially
those of tech companies, had been at the centre of considerable
controversy in the US during the Internet bubble when New
Economy companies were increasingly resorting to what are
called pro forma earnings results - results stripped off some
very significant costs.
At the
centre of S &P's "effort to return transparency and consistency
to corporate reporting" it its focus on what it refers to
as core earnings, or the after-tax earnings generated from
a corporation's principal business or businesses.
As S
&P believes that there is a general understanding of what
is included in 'As Reported Earnings', its definition of core
earnings begins with 'as Reported' - and then makes a series
of adjustments.
Its definition
of core earnings includes employees stock options grant expenses,
restructuring charges from ongoing operations, write-downs
of depreciable or amortizable operating assets, pension costs
and purchased research and development.
Excluded
from the definition are impairment of goodwill charges, gains
or losses from asset sales, pension gains, unrealised gains
or losses from hedging activities, merger and acquisition
related fees and litigation settlements.
In the
context of its revamped definition of core earnings, Mr Leo
O'Neill, S & P President, has been quoted as saying: "The
increased use of so-called pro forma earnings and the measures
to report corporate performance has generated much controversy
and confusion and has not served investor interests. S & P's
core earnings definition will help build consensus and restore
investor trust and confidence in the data used to make investment
decisions".
According
to media reports, S&P will start using its new core earnings
measure immediately as the accuracy of earnings measure immediately
as the accuracy of earnings and trends in earnings are a critical
component of its credit analysis/debt rating methodology.
And so, its equity analysts will henceforth use the new measure
to work out core earnings when they examine and review stocks.
And then again, the firm will immediately begin to calculate
core earnings per share for its US indices and the main sectors
in these indices. Supporting data, S&P says, will be in its
COMPUSTAT database later this year.
The most
controversial item in S&P's new definition of core earnings
is likely to be the one relating to the expensing of options.
Even though companies are under no statutory compulsion to
act on S&P's proposals, it is expected that this item is likely
to hit tech companies hard. In fact, Dow Jones, quoting S&P
officials, has reported that the stock options change alone
would cut financial year 2002 estimated earnings for companies
in the S&P 500 index by an average of 10 per cent.
(Source:
Business Line)
Go
to top
|
