S&P officials said in a news release that the inclusion of option expense will result in a 4.2% decrease in earnings for the S&P 500 in 2005, while impacting the Information Technology sector the most with an earnings cutback of 18%. S&P said it is making the move in light of requirements that companies begin reflecting options expenses with their fiscal periods starting June 15, 2005.
“The ability to compare costs across company and sector
levels is vital to the investing community,” said Howard
Silverblatt, Market Equity Analyst at Standard &
Poor’s, in the news release. “A consistent earnings
methodology that builds upon accepted accounting standards
and procedures is a vital component of investing. By
including option expense in Operating and As Reported
earnings, Standard & Poor’s is contributing to a more
transparent and informed investment environment.”
The phase in of the expensing rules will create a short-term disruption for investors, in the comparison of issues. As a result, Standard & Poor’s is maintaining option expense as a separate data item that can be used to adjust historical data for comparative use. In addition, some companies have accelerated their options, which will initially reduce their option expense for fiscal 2006.
Based on 2004 fiscal data for the S&P 500, As Reported earnings would have been reduced by 4.4% if all option expense had been included. Standard & Poor’s determined that 114 issues omitted option expense in 2004, which would have reduced their As Reported earnings by at least 10%. In addition, 12 issues that reported a gain in 2004 would have reported a loss if option expense had been included.
More information is at www.standardandpoors.com/indices .