S&P Launches Profit Potential Measure

May 15, 2002 (PLANSPONSOR.com) - Aiming to return transparency and consistency to corporate reporting, which has fallen into disrepute following a spate of high profile bankruptcies, Standard & Poor's published a set of definitions for use in its analysis of the corporate operating earnings of US publicly held companies.

“Measures of Corporate Earnings”, which, the ratings company says, provides a consistent method of gauging a company’s potential for profitability, was set down following discussions with analysts, portfolio managers, and academics in a bid for consensus and to restore investor confidence in the data used to make investment decisions.

Definitions Defined

The work begins with a definition for Core Earnings, or the after-tax earnings generated from a corporation’s principal business. The definition for Core Earnings stems from As Reported Earnings, as defined by generally accepted accounting principles (GAAP), which is then adjusted.

As Reported Earnings excludes two items – discontinued operations and extraordinary items.

While pension costs, a business expense, will be included in S&P’s definition of Core Earnings, pension gains will be excluded.

Also included in the definition are:

  • employee stock options grant expenses
  • restructuring charges from ongoing operations
  • write-downs of depreciable or amortizable operating assets
  • purchased research and development.

Excluded from the definition are:

  • impairment of goodwill charges
  • gains or losses from asset sales
  • unrealized gains or losses from hedging activities
  • merger and acquisition related fees
  • litigation settlements.

Standard & Poor’s will calculate and report Core Earnings its US equity indices, including the S&P 500 and its research team will adopt Core Earnings in its both its equities analysis and its debt rating methodology.

The text of “Measures of Corporate Earnings” may be found on Standard & Poor’s Web site .