Chapter 7 — Presentation and Disclosure

7.1 Requirements Under U.S. GAAP

7.1.1 Earnings per Share

7.1.1.1 Basic EPS

As noted in ASC 260-10-45-10, basic EPS is calculated “by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period.” Although freestanding equity-linked instruments that are within the scope of ASC 815-40 do not represent outstanding common shares, they can affect income available to common stockholders in the calculation of basic EPS. In particular:

The two-class method of calculating EPS applies to contracts that participate on a nondiscretionary basis in the entity’s undistributed earnings. Examples of freestanding equity-linked instruments that may trigger application of the two-class method include (1) those that entitle the holder to participate in cash dividends on the entity’s common stock and (2) forward contracts to issue common shares that include a reduction to the forward price or an increase in the number of shares when the entity declares a cash dividend. For further discussion, see Sections 5.3.3.4 and 5.3.3.5 of Deloitte’s Roadmap Earnings per Share.
For freestanding equity-classified contracts that contain a down-round feature, an adjustment to income available to common stockholders is required when the down-round feature is triggered (see Section 6.1.5 of this Roadmap and Section 3.2.5.3 of Deloitte’s Roadmap Earnings per Share).
Modifications, exchanges, reclassifications, and settlements of equity-classified contracts on the entity’s own equity may cause the recognition of a dividend or expense. For further discussion, see Section 6.1.4 of this Roadmap and Sections 3.2.5.2, 3.2.6.4, and 3.2.6.5 of Deloitte’s Roadmap Earnings per Share.

7.1.1.2 Diluted EPS

Diluted EPS is a per-share performance measure under which it is assumed that (1) all dilutive potential common shares within an entity’s capital structure were outstanding during the reporting period and (2) net income was calculated by using a consistent assumption. Specifically, an entity makes various adjustments to the numerator and denominator in the calculation of basic EPS to reflect the impact of potential common shares.

Unless an exception applies (see discussion below), the treasury stock method of calculating diluted EPS applies to the following types of potential common shares if the effect is dilutive:

Written call options (warrants) on common stock.
Written call options (warrants) on convertible securities.
Forward sale contracts on common stock.
Forward sale contracts on convertible securities.

Under the treasury stock method, it is assumed that the proceeds that would be received upon settlement are used to repurchase common shares at the average market price for common stock during the period. Because the contract is assumed to be classified as equity under the treasury stock method, the entity must, in addition to adding the incremental shares to the denominator, make a numerator adjustment if the contract is classified as an asset or a liability under ASC 815-40, which would reverse the mark-to-market adjustment net of any associated income tax effects. Special considerations are necessary if the contract requires or permits net share settlement or is subject to adjustments to the number of shares or to the exercise price or forward price. For further discussion, see Section 4.2.2 of Deloitte’s Roadmap Earnings per Share.

An entity should not apply the treasury stock method, however, if the contract must be net cash settled (i.e., no common shares or potential common shares would be issued upon settlement). Further, if a potential common share is a participating security, an entity is required to use the more dilutive of the treasury stock method or the two-class method of calculating diluted EPS (see Section 5.5.4 of Deloitte’s Roadmap Earnings per Share).

Contracts that give the entity the right to purchase or sell its common stock, such as purchased put options and purchased call options on the entity’s own equity, are not included in the calculation of diluted EPS because they would only be exercised when they are in-the-money and the resulting effect would be antidilutive under the treasury stock method or the reverse treasury stock method. For further discussion, see Section 4.1.1.1 of Deloitte’s Roadmap Earnings per Share.

7.1.2 Disclosure

ASC 815-40

50-1A The disclosure guidance in this Section should help a user of financial statements understand the following:

Information about the terms and features of contracts in an entity’s own equity within the scope of this Subtopic
How those instruments have been reflected in the issuer’s statement of financial position and statement of financial performance
Information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows but has not yet been reflected in the financial statements.

50-2 The disclosure guidance in this Subtopic applies to freestanding instruments that are potentially indexed to, and potentially settled in, an entity’s own equity, regardless of whether the contract meets the criteria to qualify for the scope exception in Sections 815-40-15 and 815-40-25. Some contracts that are classified as assets or liabilities meet the definition of a derivative instrument under the provisions of Subtopic 815-10. The related disclosures that are required by Sections 815-10-50, 815-25-50, 815-30-50, and 815-35-50 also are required for those contracts. Equity-classified contracts under the provisions of this Subtopic are not required to provide the disclosures required by Section 505-10-50, other than those described in paragraph 815-40-50-5.

50-2A Changes in the fair value of all contracts classified as assets or liabilities shall be disclosed in the financial statements as long as the contracts remain classified as assets or liabilities.

Reclassifications and Related Accounting Policy Disclosures

50-3 Contracts within the scope of this Subtopic may be required to be reclassified into (or out of) equity during the life of the instrument (in whole or in part) pursuant to the provisions of paragraphs 815-40-35-8 through 35-13. An issuer shall disclose contract reclassifications (including partial reclassifications), the reason for the reclassification, and the effect on the issuer’s financial statements.

50-4 The determination of how to partially reclassify contracts subject to this Subtopic is an accounting policy decision that shall be disclosed pursuant to Topic 235.

50-5 The disclosures required by Section 505-10-50 apply to all contracts within the scope of this Subtopic as follows:

In the case of an option or forward contract indexed to the issuer’s equity, the pertinent information to be disclosed under Section 505-10-50 about the contract includes all of the following:
1. The forward rate
2. The option strike price
3. The number of issuer’s shares to which the contract is indexed
4. The settlement date or dates of the contract
5. The issuer’s accounting for the contract (that is, as an asset, liability, or equity).
If the terms of the contract provide settlement alternatives, those settlement alternatives shall be disclosed under Section 505-10-50, including all of the following:
1. Who controls the settlement alternatives and a description of those alternatives
2. The maximum number of shares that could be required to be issued to net share settle a contract, if applicable. Paragraph 505-10-50-3 requires additional disclosures for actual issuances and settlements that occurred during the accounting period.
If a contract does not have a fixed or determinable maximum number of shares that may be required to be issued, the fact that a potentially infinite number of shares could be required to be issued to settle the contract shall be disclosed under Section 505-10-50.
For each settlement alternative, the amount that would be paid, or the number of shares that would be issued and their fair value, determined under the conditions specified in the contract if the settlement were to occur at the reporting date and how changes in the fair value of the issuer’s equity shares affect those settlement amounts (for example, the issuer is obligated to issue an additional X shares or pay an additional Y dollars in cash for each $1 decrease in the fair value of one share) shall be disclosed under Section 505-10-50. (For some issuers, a tabular format may provide the most concise and informative presentation of these data.)
The disclosures required by paragraph 505-10-50-11 shall be made for any equity instrument in the scope of this Subtopic that is (or would be if the issuer were a public entity) classified as temporary equity. (That paragraph applies to redeemable stock issued by nonpublic entities, regardless of whether the private entity chooses to classify those securities as temporary equity.)
The disclosures required by paragraph 505-10-50-18 also shall be made for an equity-classified contract within the scope of this Subtopic that is entered into in connection with the issuance of convertible preferred stock.

Issuer’s Accounting for Modifications or Exchanges of Freestanding Equity-Classified Written Call Options

50-6 For a freestanding equity-classified written call option modified or exchanged during any of the periods presented and for which an entity has recognized the effect in accordance with paragraph 815-40-35-17, an entity shall disclose the following:

Information about the nature of the modification or exchange transaction (see paragraph 815-40-35-15)
The amount of the effect of the modification or exchange (see paragraph 815-40-35-16)
The manner in which the effect of the modification or exchange has been recognized (see paragraph 815-40-35-17).

ASC 505-10

50-3 An entity shall explain, in summary form within its financial statements, the pertinent rights and privileges of the various securities outstanding. Examples of information that shall be disclosed are dividend and liquidation preferences, participation rights, call prices and dates, conversion or exercise prices or rates and pertinent dates, sinking-fund requirements, unusual voting rights, and significant terms of contracts to issue additional shares or terms that may change conversion or exercise prices (excluding standard antidilution provisions). An entity shall disclose within its financial statements the number of shares issued upon conversion, exercise, or satisfaction of required conditions during at least the most recent annual fiscal period and any subsequent interim period presented. An entity also shall disclose within the financial statements actual changes to conversion or exercise prices that occur during the reporting period (excluding changes due to standard antidilution provisions).

50-3A For a financial instrument with a down round feature that has been triggered during the reporting period and for which an entity has recognized the effect in accordance with paragraph 260-10-25-1, an entity shall disclose the following:

The fact that the feature has been triggered
The value of the effect of the down round feature that has been triggered.

ASC 815-40 requires disclosure of the following for freestanding equity-linked financial instruments:

Changes in the fair value of contracts on an entity’s own equity classified as assets or liabilities.
Information related to contracts on own equity reclassified into or out of equity (in whole or in part), such as:
- Contract reclassifications (including partial reclassifications).
- The reason for reclassifications.
- The effect of reclassifications on the issuer’s financial statements.
- The entity’s accounting policy for determining how to partially reclassify contracts.
Information related to modifications or exchanges of equity-classified written call options.
Information related to the entity’s capital structure, including:
- For options or forwards indexed to the issuer’s equity, the forward rate, the option strike price, the number of underlying shares, the settlement date or dates, and the accounting for the contract (i.e., as an asset, a liability, or equity).
- For contracts that contain settlement alternatives (e.g., physical, net share, or net cash), those settlement alternatives, which party controls the settlement alternatives (i.e., the entity or the counterparty), and the maximum number of shares that the entity could be required to deliver to net share settle the contract, if applicable.
- If a contract could require the entity to issue a potentially infinite number of shares, that fact.
- For each settlement alternative, the amount that would be paid, or the number of shares that would be issued and their fair value, determined under the conditions specified in the contract if the settlement were to occur on the reporting date, and how changes in the fair value of the issuer’s equity shares affect those settlement amounts.

ASC 505-10-50 requires disclosure of:

Contractual terms that might adjust conversion or exercise prices as well as actual changes to such prices that occurred during the reporting period. An entity should therefore disclose contractual adjustments that are subject to evaluation under the indexation guidance in ASC 815-40-15 (see Chapter 4). However, disclosure is not required for standard antidilution provisions (see Section 5.5 for the definition of such provisions).
Information about financial instruments with down-round features that have been triggered during the reporting period, including the fact that the feature was triggered and the value of the feature’s effect (see Sections 4.3.7.2 and 6.1.5).

An entity should also consider disclosure requirements in other Codification topics and subtopics that may be applicable to freestanding equity-linked financial instruments. For example, contracts on own equity that must be accounted for as derivatives under ASC 815-10 or ASC 815-15 are subject to any applicable disclosure requirements in ASC 815-10, ASC 815-15, ASC 815-25, ASC 815-30, and ASC 815-35. Further, freestanding equity-linked financial instruments that are accounted for at fair value under ASC 815-40 are subject to disclosures about fair value measurements under ASC 820.

The disclosure requirements in ASC 815-40 discussed above do not apply to embedded equity-linked financial instruments. Rather, the disclosure guidance in ASC 470-20, ASC 505-10, and ASC 815 applies to embedded equity-linked derivatives in hybrid contracts.

ASC 470-20

50-2A An entity that enters into a share-lending arrangement on its own shares in contemplation of a convertible debt offering or other financing shall disclose all of the following. The disclosures must be made on an annual and interim basis in any period in which a share-lending arrangement is outstanding.

A description of any outstanding share-lending arrangements on the entity’s own stock
All significant terms of the share-lending arrangement including all of the following:
1. The number of shares
2. The term
3. The circumstances under which cash settlement would be required
4. Any requirements for the counterparty to provide collateral.
The entity’s reason for entering into the share-lending arrangement
The fair value of the outstanding loaned shares as of the balance sheet date
The treatment of the share-lending arrangement for the purposes of calculating earnings per share
The unamortized amount of the issuance costs associated with the share-lending arrangement at the balance sheet date
The classification of the issuance costs associated with the share-lending arrangement at the balance sheet date
The amount of interest cost recognized relating to the amortization of the issuance cost associated with the share-lending arrangement for the reporting period
Any amounts of dividends paid related to the loaned shares that will not be reimbursed.

50-2B An entity that enters into a share-lending arrangement on its own shares in contemplation of a convertible debt offering or other financing shall also make the disclosures required by Topic 505.

50-2C In the period in which an entity concludes that it is probable that the counterparty to its share-lending arrangement will default, the entity shall disclose the amount of expense reported in the statement of earnings related to the default. The entity shall disclose in any subsequent period any material changes in the amount of expense as a result of changes in the fair value of the entity’s shares or the probable recoveries. If default is probable but has not yet occurred, the entity shall disclose the number of shares related to the share-lending arrangement that will be reflected in basic and diluted earnings per share when the counterparty defaults.

ASC 470-20-50-2A through 50-2C include incremental disclosure requirements related to own-share lending arrangements executed in contemplation of a convertible debt offering or other financing (see Section 2.9).