12.4 Earnings per Share

ASC 718-10

Earnings per Share

45-1 Topic 260 requires that equity share options, nonvested shares, and similar equity instruments granted under share-based payment transactions be treated as potential common shares in computing diluted earnings per share (EPS). Diluted EPS shall be based on the actual number of options or shares granted and not yet forfeited regardless of the entity’s accounting policy for forfeitures in accordance with paragraphs 718-10-35-1D and 718-10-35-3, unless doing so would be antidilutive. If vesting in or the ability to exercise (or retain) an award is contingent on a performance or market condition, such as the level of future earnings, the shares or share options shall be treated as contingently issuable shares in accordance with paragraphs 260-10-45-48 through 45-57. If equity share options or other equity instruments are outstanding for only part of a period, the shares issuable shall be weighted to reflect the portion of the period during which the equity instruments are outstanding.

45-2 Paragraphs 260-10-45-29 through 45-34 and Example 8 (see paragraph 260-10-55-68) provide guidance on applying the treasury stock method for equity instruments granted in share-based payment transactions in determining diluted EPS.

In calculating EPS, an entity should consider how a share-based payment award may affect (1) income available to common shareholders (i.e., the numerator in the EPS calculation) and (2) the weighted-average number of common shares or dilutive potential common shares (i.e., the denominator in the EPS calculation). Because an entity recognizes the fair-value-based measure of an award as compensation cost (or as a reduction of revenue) in arriving at the entity’s income available to common shareholders, awards granted in return for goods or services or as a sales incentive to a customer will typically affect the EPS numerator. An entity should consider whether share-based payment awards may be participating securities that affect basic EPS under the two-class method as well as the effects of ESPPs on EPS.

For additional information about considerations related to the calculation of EPS for share-based payment awards, see Chapter 7 of Deloitte’s Roadmap Earnings per Share.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.