“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.
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
Standard & Poor’s Web site