FEI offers caution on S&P framework. (Advocacy).FEI FEI Fédération Équestre Internationale. reacted quickly and with considerable skepticism to the mid-May announcement by Standard & Poor's Corp. that it had created a new method for calculating corporate operating earnings Operating Earnings Profits after subtracting expenses such as marketing, cost of goods sold, administration and general operating costs from revenue. Notes: Tax and interest expenses are not subtracted - operating earnings are synonymous with EBIT (earnings before . This "core earnings" concept, the ratings agency said, is based on "as reported" earnings, to which it adds a series of exclusions, such as goodwill impairment charges, gains or losses on asset sales, hedging gains or losses and merger-related fees. FEI voiced its overall support for continued work on making financial information more meaningful to investors but urged S&P to work with the Financial Accounting Standards Board Financial Accounting Standards Board (FASB) Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP). on its current project on Reporting Financial Performance rather than introduce a new, untested measure on its own. FEI expressed concern that the core earnings measure developed by S&P oversimplifies the decisions that investors routinely make in analyzing reported earnings and valuing companies, and that its "one size fits all" approach will inherently bias the measure against certain types of industries and companies. FEI concerns with S&P's core earnings measure include: * Employee benefit costs included in S&P's core earnings do not reflect the funding status of benefit plans. Accordingly, companies in vastly different positions relative to future payment obligations would look the same to investors. * Asset write-downs are included in core earnings but gains/losses on asset sales are not. Because reversals of accounting write-downs are prohibited under GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). , the proposed measure introduces a significant negative bias to the measure of core earnings. * Stock compensation expense is deducted from S&P's core earnings measure based on pro-forma information provided by companies under GAAP. FBI notes that leading valuation experts have criticized the use of market-based option pricing models option pricing model A mathematical formula for determining the price at which an option should trade. The model expresses the value of an option as a function of the value of the underlying asset, length of time until maturity, exercise price, yields on to value employee stock options. * The S&P measure excludes onetime gains but not one-time losses (e.g., restructuring). Furthermore, the decision of whether gains are recurring or "one-time" is highly subjective. "The proliferation proliferation /pro·lif·er·a·tion/ (pro-lif?er-a´shun) the reproduction or multiplication of similar forms, especially of cells.prolif´erativeprolif´erous pro·lif·er·a·tion n. of different measures of core earnings is clear evidence our current system is flawed and needs to be overhauled," noted FEI President and CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. Philip B. Livingston. "We believe it is important that all interested parties, including S&P, work together to achieve this. Otherwise, I'm afraid what S&P is |
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