FEI expressed concern that the core earnings measure developed by S&P and announced last week 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, 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.  FEI notes that leading valuation experts have criticized the use of market-based option pricing models to value employee stock options. 
•  S&P measure excludes one-time gains but not one-time losses (e.g., restructuring).  The inconsistency of this treatment is hard to understand.  Furthermore, the decision of whether gains are recurring or "one-time" is highly subjective. 

"The proliferation of different measures of core earnings is clear evidence our current system is flawed and needs to be overhauled," noted FEI President and CEO 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 doing will only add to the confusion."

See also FEI President Opposes Expensing of Stock Options and S&P to Include Stock Options in Earnings.

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