Merrill Lynch will adopt a newly created framework for assessing the quality of earnings for U.S. companies.

In a research report released today entitled, “Quality of Earnings: Towards a 360 degrees View of Reality”, Merrill Lynch identifies six key income statement and balance sheet measures that should be reviewed when evaluating companies.

The brokerage firm believes these measures will help investors differentiate companies based on the quality of their reported numbers. The report discusses the distinctive elements of high quality earnings and compares GAAP and pro forma earnings.

Merrill defines high quality earnings as those which are: earned by superior returns on total capital; close to being realized in cash; repeatable because of the level of capital invested in assets; not dependent on transitory tax rates; and not at risk because of high financial leverage and dividend obligations.

Of the six measures discussed in the report, four are based on historical financial statements (pretax return on capital, cash realization, productive asset reinvestment and the tax rate), and two are based on Standard & Poor’s measures (common stock ranking and credit rating).

“We believe these measures are useful in monitoring changes in the ability of a company’s assets to generate consistent income and that these tools can assist in spotting changes before they are reflected in a company’s income statement,” said David Hawkins, a Harvard Business School Professor and Merrill Lynch’s consultant on accounting issues.