8.5 Presentation and Disclosure
8.5.1 Presentation
As noted in Section 8.3, own-share lending arrangements within the scope of this guidance (see Section 8.2) are initially recognized as a debt issuance cost, with an offset to APIC. Under ASC 835-30-45-1A, debt issuance costs are reported as a direct deduction from the par amount of the debt on the face of the balance sheet. They are not classified as a deferred charge.
8.5.2 Earnings per Share
ASC 470-20
45-2A Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. If dividends on the loaned shares are not reimbursed to the entity, any amounts, including contractual (accumulated) dividends and participation rights in undistributed earnings, attributable to the loaned shares shall be deducted in computing income available to common shareholders, in a manner consistent with the two-class method in paragraph 260-10-45-60B.
ASC 470-20 contains EPS guidance for own-share lending arrangements executed in contemplation of a convertible debt offering or other financing. Under this guidance, loaned shares are excluded from EPS unless the counterparty to the share-lending arrangement defaults on its obligation to return the loaned shares (or an equivalent amount of consideration). If the counterparty defaults, the shares are included in both basic and diluted EPS. (Note that in ASC 470-20-45-2A, the threshold for including the loaned shares in EPS is the counterparty’s default, whereas in ASC 470-20-35-11A, the threshold for recognizing a loss is that it is probable that the counterparty will default.)
In practice, own-share lending arrangements often require the counterparty to reimburse the issuer for any dividends paid on the loaned shares. If the counterparty does not reimburse the issuer for such dividends, however, the issuer must deduct the corresponding amount and any participation right in undistributed earnings from income available to common stockholders.
Connecting the Dots
For a discussion of the presentation and disclosure of EPS related to own-share
lending arrangements, see Deloitte’s Roadmap Earnings per Share, in
particular Sections
3.3.2.8, 4.8.3.5, 5.3.3.9,
and 8.5.
8.5.3 Disclosure
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:
- The number of shares
- The term
- The circumstances under which cash settlement would be required
- 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 includes disclosure requirements related to own-share lending
arrangements executed in contemplation of a convertible debt offering or other
financing. These supplement the general requirements for the issuer’s disclosure
of information about securities in ASC 505-10 (see Section 4.6 of this Roadmap and Chapter 7 of Deloitte’s
Roadmap Contracts on an
Entity’s Own Equity).