S&P Clamps Down on Earnings Reports

May 13, 2002 (PLANSPONSOR.com) - Under new rules expected to be announced soon, companies would no longer be allowed to keep certain items out of their financial reports and would be required to exclude pension fund gains.

According to a Reuters news report, rating agency Standard & Poor’s (S&P) should announce the new guidelines that are designed to make the financial documents more honest and more reflective of a firm’s true financial picture.

The expected S&P rules cover:

  • pension fund gains, which will no longer be included in operating earnings, however they would be required to include annual pension costs
  • the costs of stock options, which can no longer be excluded from operating earnings, and
  • severance payments, asset write-downs, and the costs of closing operations, which can no longer be excluded from operating earnings because they reflect the true cost of doing business 

US companies in recent years have excluded a raft of what they say are one-time expenses, like severance packages, from operating earnings. Critics have said those practices have made earnings appear rosier than they actually are.

The move by S&P will not force any changes in the way firms report, but it will alter some benchmark investor calculations, most importantly the value of shares in the S&P 500 relative to their reported earnings.
S&P will also establish its own definitions of “as reported,” “operating,” and “pro forma” earnings, referring to types of earnings used by companies and analysts, which sometimes are more a hindrance than a help in describing a firm’s financial condition.