NEW YORK (CBS.MW) -- Ratings agency Standard & Poor's announced
Tuesday it was changing they way it evaluates corporate earnings, hoping
that a back-to-basics approach will stanch an erosion of investor confidence
as a result of scandals involved inflated earnings.
S&P said that it will now
incorporate charges such as
options, restructuring costs,
pension fund contributions and
goodwill as they reflect the true
cost of doing business.
The ratings agency said it will
start assessing a company's
"core earnings," meaning the
earnings generated from its basic
business. Operating earnings are
easily skewed and often do not
reflect the various charges that
are part of the cost of doing
business, it said.
S&P's proposed changes:
Include the costs of stock
options as they are part
of employee
compensation; it has
proposed that companies
start to report the costs
on a quarterly basis rather
than annually under
current rules.
Include pension costs as
they are part of employee
compensation costs, but
exclude gains from
pension plan investments.
Include restructuring costs from layoffs and the shutting down of
facilities.
On the issue of stock options, earnings could have been reduced by 10 percent last
year on average if they were included, said David Blitzer, managing director and
investment strategist for S&P.
He said that while companies could occasionally exclude restructuring charges and
write-offs, "most of the time, they are adjustments to ongoing operations. All these
costs should be included in core earnings."
S&P said that the inconsistency of earnings -- reflected in the way companies have
manipulated operating earnings -- has led to a loss of investor confidence. "The
difficulty is that there is no definition for operating earnings. ... There is no consistent
definition and it can change quarter to quarter," said Blitzer.
S&P said that it would start recalculating earnings of companies on the S&P 500
going back 10 years and planned to release the results starting from the end of the
month.
Based on a sample recalculation of earnings for high-profile companies such as
General Electric (GE: news, chart, profile), Cisco (CSCO: news, chart, profile) and
Tricon Global (YUM: news, chart, profile), S&P analysts said that they expect the P/E
ratios of companies to be higher and earnings growth to be less consistent than what
has been reported.
The impact of charges for each of these companies varies. For GE, pension costs
had the biggest effect on earnings, while option expenses could undermine Cisco's
bottom line, said S&P analyst Robert Friedman. |
