DEFINITION of 'S&P Core Earnings'

The calculation of S&P core earnings, as defined by Standard and Poor's (S&P) begins with reported net income calculated in accordance with Generally Accepted Accounting Principles (GAAP). Reported net income is adjusted to include employee stock option grant expense, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, pension costs, purchased research and development expenses, merger and acquisition related expenses and unrealized gains or losses from hedging activities.

Goodwill impairment charges, gains or losses from asset sales, pension gains, reversal of prior year charges and provisions and litigation or insurance settlements and proceeds are excluded from the calculation. For example, included in core earnings for IBM would be revenue generated by the sale of computer software and hardware, but income generated by investment gains in the firm’s pension plan would not be included.

BREAKING DOWN 'S&P Core Earnings'

The S&P core earnings measure is meant to capture earnings due to ongoing core business operations. Because it excludes extraneous or one-time events and disregards the effect of capital market performance on income, it is typically viewed as an indicator of a company’s pure earnings performance.

In the early 2000s, the bankruptcies of notable organizations, such as Enron and WorldCom shone a light on common accounting obscurities and outright scandals. There was little uniformity across companies in their approaches to the calculation and reporting of earnings, leading to opaque disclosures and difficult cross-industry comparisons. In response to this plethora of disparate methods for calculating earnings among publicly traded companies, Standard and Poor’s, a leading provider of index data and a database of corporate financial data, sought to develop a succinct, uniform measure that could be applied across companies. The firm first issued a research note on earnings calculations that included a suggested approach to calculating operating earnings in the Fall of 2001. This initial research was distributed to financial practitioners, securities and accounting analysts, portfolio managers, corporate executives, academic researchers and other investment professionals, and sparked a healthy debate on the topic of reported earnings.

Ultimately, this debate led to a collaborative effort between Standard and Poor’s and prominent industry leaders to create a uniform definition of corporate earnings. S&P core earnings provide for transparency, consistency and a more stringent definition of a company’s earnings, and therefore provide an improved platform for analysts and investors to evaluate and compare those companies that report core earnings.

RELATED TERMS
  1. Core Earnings

    Core earnings are derived from a company's main or principal ...
  2. Goodwill

    Goodwill is an intangible asset that arises as a result of the ...
  3. Impaired Asset

    A company's asset that is worth less on the market than the value ...
  4. Core Holding

    Core holdings are a central investment of a long-term portfolio ...
  5. Goodwill To Assets Ratio

    The goodwill to assets ratio is a ratio that measures how much ...
  6. Impairment

    Impairment is an accounting principle that describes a permanent ...
Related Articles
  1. Investing

    Goodwill Impairment Test: When You Overpay in M&A

    Overpaying for acquisitions can result in goodwill impairment charges and loss in stock value. How do companies test whether they have paid too much?
  2. Investing

    Writing Down Goodwill

    An ill-fated acquisition of Hewlett-Packard's demonstrates what can happen when goodwill goes bad.
  3. Investing

    Accounting Rules Could Roil The Markets

    FAS 142 is an accounting rule that changes the way companies treat goodwill. Be aware of the impact it has on reported earnings to avoid making bad investment decisions.
  4. Investing

    Can You Count on Goodwill?

    Carefully examine goodwill and its sources before considering the value of your investment.
  5. Investing

    How Does Goodwill Affect Financial Statements?

    Goodwill is a bit of a paradox--intangible, yet it is recorded as an asset on the purchasing company's balance sheet.
  6. Investing

    The Top 5 Large-Cap Core Mutual Funds for 2016

    Learn the benefits and risks of large-cap core investments, and discover the best large-cap core mutual funds to consider for 2016.
  7. Retirement

    How to Spot Pension Fraud Before It Hurts You

    Don't let pension fraud threaten your livelihood after retirement. Here's what to watch out for.
  8. Investing

    How to calculate goodwill

    Goodwill is an intangible, but it is still possible to effectively calculate or estimate it for a company.
  9. Retirement

    How To Evaluate Pension Risk By Analyzing Annual Costs

    Learn how to assess whether a company's pension plan is posing more risks than what the footnotes indicate.
  10. Investing

    Earnings Sustainability: The Key To Your Investing Future

    Learn how to analyze earnings sustainability - an important part of making sound investments.
RELATED FAQS
  1. How does goodwill amortize?

    Learn about the Financial Accounting Standards Board 's (FASB) rules for goodwill amortization, how the rules have changed ... Read Answer >>
  2. How is impairment loss calculated?

    Learn how companies re-evaluate their assets and compare them against book values to recognize impairment and why this strategy ... Read Answer >>
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center