In response to S&P’s announcement of a series of new earnings definitions, Financial Executives International (FEI) expressed concern that the Core Earnings measure developed by S&P oversimplifies the decisions that investors routinely make in analyzing reported earnings and valuing companies.
Further, the group complained that S&P’s “one size fits all” approach would inherently bias the measure against certain types of industries and companies.
FEI is concerned that employee benefit costs included in S&P’s Core Earnings do not reflect he funding status of benefit plans. “Accordingly, companies in vastly different positions relative to future payment obligations would look the same to investors,” FEI said.
The group also takes issue with the fact that asset write-downs are included in Core Earnings but gains/losses on asset sales are not. Because reversals of accounting write-downs are prohibited under GAAP, the proposed measure introduces a significant negative bias to the measure.
Further, the group is concerned that stock compensation expenses are deducted from S&P’s Core Earnings measure based on pro-forma information provided by companies under GAAP, noting that the use of market-based option pricing models to value employee stock options is problematic.
FEI also points out that S&P’s measure excludes one-time gains but not one-time losses, such as restructuring, saying “the inconsistency of this treatment is hard to understand”.