31 January 2005

FT: Key performance ratio under scrutiny

Investors have developed a multitude of more complex ways to examine companies and markets. But net earnings revenue minus costs, interest, tax, depreciation and amortisation have retained top billing. But that pre-eminence is under attack. Some of the experts who write the world's accounting rules view the concept with scorn.

Tom Jones, vice-chairman of the International Accounting Standards Board, says: “Some board members say the whole focus on income and earnings per share is pernicious. This business of the stock dropping because the Street expected earnings to be up 2 cents a share and they were only up 1 cent is crazy.”

The IASB has formed a working party of outside professionals in collaboration with its US counterpart, the Financial Accounting Standards Board, to consider the faults of today's performance measures alongside their incongruous popularity.

At the heart of the debate is one of accountancy's trickiest questions: given a ream of figures on a company's pensions investments, its foreign property portfolio and its oil derivatives, which should appear as sources of profit or loss in income statements, and which should be assets confined to the balance sheet?

Many rulemakers say it is impossible to find a principle that determines what should go where. Championed by some as a new candidate for the first page of financial statements is “comprehensive income” a catch-all number that absorbs gains and losses anywhere in the accounts.

The proponents of comprehensive income say investors should focus on all the risks to which a company is exposed.

For equity analysts, comprehensive income promises a flood of potentially useful data, but one that could be overwhelming.

Mr Jones at the IASB emphasises that the standard setters are garnering outside opinions and have decided nothing. But one conclusion is already clear: setting accounting standards is no way to make friends.

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© Financial Times