Table: A Better Way to Gauge Earnings?

S&P's new core earnings measure is a radical departure from the "bottom line" measures of income that investors now use. Here are the key issues, and the arguments for and against


CREATING A CORE The proliferation of operating and pro forma calculations EARNINGS MEASURE is confusing and undermines investors' ability to under- stand the ongoing earnings power of a company's opera- tions. By developing a standard definition of earnings that come from operations, S&P is striving to create con- sistency and restore investors' faith in the numbers.

TREATING EMPLOYEE The S&P measure would treat stock options the same as STOCK OPTIONS other compensation, such as salary and bonuses. That AS AN EXPENSE recognizes a real cost and may help trim excessive options grants.

DEDUCTING These gains reflect the abilities of investment advisers, PENSION GAINS not the performance of operations, so they should not be FROM INCOME considered part of core earnings.

INCLUDING With the rise of "recurring nonrecurring" charges--one- RESTRUCTURING time charges taken quarter after quarter--it makes sense CHARGES to include them in any analysis of ongoing business.


CREATING A CORE The new S&P number will add one more entrant to the hodge- EARNINGS MEASURE podge of earnings numbers now in use. Moreover, since dif- ferent industries face different operating and financial conditions, a "one-size-fits-all" number isn't much use anyway. Better for investors to make their own calcula- tions tailored to specific companies.

TREATING EMPLOYEE Many companies, especially in the tech sector, will be STOCK OPTIONS penalized. Expensing options might lessen their use, AS AN EXPENSE limiting a tool intended to spur innovation and align management's interest with shareholders.

DEDUCTING Companies must account for the costs of running pension PENSION GAINS plans, so it is only fair to count income from pension FROM INCOME plans as well. Another problem: Pension data would be available only annually, not quarterly.

INCLUDING Not all restructuring write-offs are the same, and this RESTRUCTURING cookie-cutter approach would cause charges that truly are CHARGES one-time events to impact operating earnings.

Data: Standard & Poor's, BusinessWeek

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