Risk & Compliance

Standard and Poor’s: Pro Forma a Poor Standard

S&P to offer plan creating uniform definition of operating earnings, says report.
Stephen TaubNovember 7, 2001

Another county heard from.

Responding to the growing concerns about the deterioration in the quality of earnings reports, Standard & Poor’s is expected to send a letter today to Wall Street executives laying out suggestions to create a uniform definition for operating earnings, according to The Wall Street Journal.

S&P says it is reacting to the growing number of complaints from the investment community that earnings reports are “becoming harder to understand, more difficult to compare across companies and less useful to analysts and investors,” according to the paper.

Of course, S&P has no power to strongarm any company into changing its reporting practices. But, the ratings agency is clearly trying to protect the integrity of its widely watched S&P 500 stock index, which is frequently used to determine stock market valuation.

S&P recommends a number of items that companies regularly exclude as part of operating earnings be included, because they “are normally part of a company’s operations.” These include restructuring charges, write-downs of assets from continuing operations, stock-option expenses and write-offs of research and development purchased from other companies, according to the Journal.

S&P said its initial inclination is to exclude four broad categories of expenses from future operating-earnings calculations, the Journal pointed out. These include charges from write-downs of goodwill, charges from litigation settlements, gains and losses on asset sales, and “acquisition/merger related expenses,: a term the letter does not define.

The Journal points out that the letter says write-downs from “ongoing operations” should also be included in operating earnings. But it does not say whether unrealized gains and losses on investments–considered a nonoperating item under GAAP–should be included in operating earnings.

The letter also says litigation settlement costs should be excluded from operating earnings.