U.S. GAAP Codification of Accounting Standards Guide by AccountingINFO.com

U.S. GAAP Codification of Accounting Standards

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

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

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