U.S. GAAP Codification of Accounting Standards

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U.S. GAAP Accounting Standards
Codification Topic 260: Earnings per Share


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Codification Topic 260
Earnings per Share


Earnings per Share
SFAS 128, February 1997
"Earnings per Share"

Earnings per Share (EPS)
1. Basic Earnings per Share
2. Diluted Earnings per Share

Basic EPS
Basic EPS = (A) / (B)
(A) = income available for common stockholders
(B) = weighted-average number of common shares outstanding

Diluted EPS
Diluted EPS = (C) / (D)
(C) = (A) + (A1)
(D) = (B) + (B1)
(A1) The effects of dilutive potential common shares (DPCS) on income 
(B1) The effects of dilutive potential common shares (DPCS) on number of shares 
DPCS = Dilutive Potential Common Shares

Potential common shares
1. convertible securities
2. options
3. warrants
4. contingent stock agreements

Dilutive
--> if the effect of potential common shares is
--> a "decrease" in EPS

Antidilutive
--> if the effect of potential common shares is
--> an "increase" in EPS

(A1) The effects of DPCS on income
--> add back (A2) and (A3) to income
(A2) dividends to convertible preferred shares
(A3) interest for convertible debt

(B1) The effects of DPCS on number of shares
--> add (B2) to the number of shares
(B2) net increase in common shares = (B3) - (B4)
(B3) additional common shares assumed to be issued
(B4) number of shares assumed to be bought back 
--> using the proceeds from the exercise of options and warrants

"If-converted method" for convertible securities
1. It is assumed that convertible securities were converted
--> at the beginning of the period
--> or at the time of issuance if issued during the period
2. Add additional number of common shares
--> that would have been issued if they were converted
3. For convertible preferred shares 
--> add back dividends to convertible preferred shares to income
4. For convertible debt 
--> add back interest for convertible debt to income

"Treasury stock method" for written call options and warrants
1. It is assumed that call options were exercised
--> at the beginning of the period
2. At the time of exercise
--> option holders will pay exercise price per share
--> to get common shares
3. It is assumed that the proceeds were used 
--> to buy back its own common shares in the market
--> at the average market price during the period
4. Net increase in common shares will be the difference between (1) and (2) 
(1) number of shares issued due to assumed exercise of options and warrants
(2) number of shares assumed to be purchased back in the market using the proceeds of (1)

An example of written call options
Entity A sold call options for 600 shares of common stock
--> exercise price = $100
--> average market price = $120
Proceeds from the assumed exercise = 600 shares x $100 = $60,000
Number of treasury shares assumed to be bought back = $60,000 / $120 = 500 shares
Entity A is assumed to sell 600 shares and buy 500 shares
Increase in the number of shares = 600 - 500 = 100 shares

"Reverse treasury stock method" for written put options
1. When a put option is exercised
--> option holder will ask the entity to buy back common shares
2. It is assumed that the entity will issue sufficient common shares
--> to raise enough proceeds to buy back common shares from the holders of put option
--> at the beginning of the period
--> at the average market price during the period
3. It is assumed that the proceeds were used
--> to buy back common shares from the holders of put option
4. Net increase in common shares will be the difference between (3) and (4) 
(3) number of shares assumed to be issued to raise enough proceeds
(4) number of shares assumed to be purchased back from the holders of put option

An example of written put options
Entity A sold put options for 400 shares of common stock
--> exercise price = $100
--> average market price = $80
Proceeds required to purchase 400 shares at $100 = 400 shares x $100 = $40,000
Number of shares issued to raise $40,000 --> $40,000 / $80 = 500 shares
Entity A is assumed to issue 500 shares at the beginning of the period at $80 per share
Entity A is assumed to issue 500 shares and buy 400 shares
Increase in the number of shares = 500 - 400 = 100 shares

Purchased call options
Options will be exercised only if EP < MP
EP: Exercise Price
MP: Market Price
If EP < MP, the effect of purchased call option is antidilutive

An example of purchased call options
Entity A purchased call options for 600 shares of common stock
--> exercise price = $100
--> average market price = $120
Proceeds required to buy 600 shares --> 600 shares x $100 = $60,000
Number of shares issued to raise $60,000 --> $60,000 / $120 = 500 shares
Entity A is assumed to issue 500 shares and buy 600 shares
Number of shares decreases --> antidilutive

Purchased put options
Options will be exercised only if MP < EP
If MP < EP, the effect of purchased put option is antidilutive

An example of purchased put options
Entity A purchased put options for 400 shares of common stock
--> exercise price = $100
--> average market price = $80
Proceeds from the assumed exercise = 400 shares x $100 = $40,000
Number of treasury shares assumed to be bought back = $40,000 / $80 = 500 shares
Entity A is assumed to sell 400 shares and buy 500 shares
Number of shares decreases --> antidilutive


International Financial Reporting Standards (IFRS)

   IAS 33: Earnings per Share


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   Codification Topic 260
   Earnings per Share
 
Subtopics of Codification Topic 260
 
   260-10 Overall   
 
Accounting Terms of Codification Topic 260-10
 
   Antidilution
   Basic earnings per share
   Call option
   Common stock
   Consolidated financial statements
   Consolidated group
   Contingent issuance
   Contingent stock agreement
   Contingently convertible instruments
   Contingently issuable shares
   Conversion rate
   Convertible security
   Diluted earnings per share
   Dilution
   Earnings per share
   Employee stock ownership plan
   Exercise price
   If-converted method
   Income available to common stockholders
   Noncontrolling interest
   Option
   Participating security
   Potential common stock
   Preferred stock
   Purchased call option
   Put option
   Reverse treasury stock method
   Rights issue
   Security
   Subsidiary
   Treasury stock method
   Warrant
   Weighted-average number of common shares outstanding   



   Other Topics at the Codification 200 
Accounting Standards Codification, ASC, Overview
 
ASC Codification Topic 205: Presentation of Financial Statements
 
ASC Codification Topic 210: Balance Sheet
ASC Codification Topic 215: Statement of Shareholder Equity
 
ASC Codification Topic 220: Comprehensive Income
ASC Codification Topic 225: Income Statement
 
ASC Codification Topic 230: Statement of Cash Flows
ASC Codification Topic 235: Notes to Financial Statements
 
ASC Codification Topic 250: Accounting Changes and Error Corrections
ASC Codification Topic 255: Changing Prices
 
ASC Codification Topic 260: Earnings per Share
 
ASC Codification Topic 270: Interim Reporting
ASC Codification Topic 272: Limited Liability Entities
ASC Codification Topic 274: Personal Financial Statements
ASC Codification Topic 275: Risks and Uncertainties
 
ASC Codification Topic 280: Segment Reporting


   U.S. GAAP Codification of Accounting Standards
Accounting Standards Codification, ASC, Overview
ASC Codification 200: Presentation
ASC Codification 300: Assets
ASC Codification 400: Liabilities
ASC Codification 500: Equity
ASC Codification 600: Revenue
ASC Codification 700: Expenses
ASC Codification 800: Broad Transactions
ASC Codification 900: Industry

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