Standard & Poor’s announced yesterday that it would include all option expenses in earnings reports for its U.S. indices, including the S&P 500.

The inclusion of option expense will result in a 4.2% decrease in earnings for the S&P 500 in 2005, it notes. The information technology sector will be hardest hit, with an earnings reduction of 18%.

“The ability to compare costs across company and sector levels is vital to the investing community,” said Howard Silverblatt, market equity analyst at Standard & Poor’s, in a release. “A consistent earnings methodology that builds upon accepted accounting standards and procedures is a vital component of investing. By including option expense in ‘operating’ and ‘as reported’ earnings, Standard & Poor’s is contributing to a more transparent and informed investment environment.”

The move comes as the U.S. Financial Accounting Standards Board requires that companies expense options starting with fiscal periods beginning after June 15. The new accounting rules that require companies to expense option costs against earnings is effective as of fiscal 2006.

While some off-calendar companies are already required to expense their option-related costs, most will not start until 2006. S&P says that this phase-in will create a short-term disruption, for investors, in the comparison of issues. As a result, Standard & Poor’s is maintaining option expense as a separate data item that can be used to adjust historical data for comparative use.

In addition, some companies have accelerated their options, which will initially reduce their option expense for fiscal 2006. Based on 2004 fiscal data for the S&P 500, As Reported earnings would have been reduced by 4.4% if all option expense had been counted in, the firm reports.

Standard & Poor’s determined that 114 issues omitted option expense in 2004, which would have reduced their As Reported earnings by at least 10%. In addition, 12 issues that reported a gain in 2004 would have reported a loss if option expense had been included.