NEW YORK — Nudging corporate America toward cleaner and clearer financial reporting, Standard & Poor’s will change the way it calculates profit for the group of companies in its influential S&P 500 stock index.
Showbiz, along with most industries, will feel the impact — in particular, companies that have used lots of option grants to compensate execs. For the first time, S&P plans to include the value of stock options as an expense to earnings, a move supported by Fed chief Alan Greenspan, as well as a number of congressmen who have proposed legislation to toughen up option accounting.
“Expensing options is the right thing to do,” said David Londoner, a longtime entertainment analyst who helped draft new film and TV accounting rules for Hollywood studios that went into effect several years ago.
S&P will announce the changes at a press conference today. The agency has no enforcement power and can only tinker with numbers for its own research and data. If others don’t follow, that could actually heighten confusion surrounding corporate earnings. But the agency’s decision sends a strong message as pressure builds post-Enron for transparency in financial reporting.
S&P also wants to cut through so-called pro-forma numbers, where a thicket of one-time charges can make operating income hard to decipher. Companies routinely ask investors to ignore certain items, like writedowns of inventory, since they don’t happen every year. “That’s ridiculous. It’s still the normal course of doing business,” Londoner said.
But the controversial new option accounting will make the biggest splash. “If you look at stock option costs of AOL Time Warner, and, historically, at AOL in particular, they’re huge,” he added.