Appendix A — Differences Between U.S. GAAP and IFRS Accounting Standards

A.4 Treatment of Mandatorily Redeemable Common Shares and Forward Contracts for Which Physical Settlement of a Fixed Number of Shares for Cash Is Required

A.4.1 Basic EPS

Under U.S. GAAP, an entity should exclude from the EPS denominator the shares that are to be redeemed or repurchased and should apply the two-class method of calculating EPS. See Section 3.2.4.3.1 for more information.

IFRS Accounting Standards do not provide basic EPS guidance on these instruments. Under IFRS Accounting Standards:

For mandatorily redeemable common shares, the basic EPS treatment could be analyzed as follows:
- Paragraph 10 of IAS 33 indicates that the denominator in the calculation of basic EPS is “the weighted average number of ordinary shares outstanding . . . during the period” (emphasis added). Paragraph 5 of IAS 33 states, in part, that an “ordinary share is an equity instrument that is subordinate to all other classes of equity instruments” (emphasis added). Thus, whether a mandatorily redeemable common share is included in the denominator in the calculation of basic EPS depends on whether the mandatorily redeemable common share (1) is considered an equity instrument and (2) is in the most subordinate class of equity instrument. Note that mandatorily redeemable common shares other than certain puttable shares are considered a liability under IFRS Accounting Standards.
For forward contracts that require physical settlement of a fixed number of equity shares for cash or other financial assets, IFRS Accounting Standards require presentation of a liability that is equal to the present value of the amount the issuer would be required to settle under the contract. Typically, under IFRS Accounting Standards, an entity would consider the equity shares that are to be repurchased outstanding in the calculation of basic EPS because the equity shares have not yet been repurchased as of the balance sheet date. The two-class method does not apply under IFRS Accounting Standards because this method is only applied under IAS 33 when the financial instrument is classified as an equity instrument.

A.4.2 Diluted EPS

Under U.S. GAAP, no further adjustment is made for diluted EPS. According to ASC 480-10-45-4, the entity simply carries forward the basic two-class method to calculate diluted EPS. Under IFRS Accounting Standards, paragraph 63 of IAS 33 indicates that an entity would apply the reverse treasury stock method to the forward repurchase agreement in the calculation of diluted EPS if the effect is dilutive. Thus, U.S. GAAP differs from IFRS Accounting Standards with regard to forward repurchase agreements because no further adjustment to the two-class method result for basic EPS is made under U.S. GAAP, while under IFRS Accounting Standards entities apply the reverse treasury stock method to the forward repurchase agreement to the extent that the instrument is dilutive. The application of the reverse treasury stock method can result in the addition of incremental shares to the denominator.

Under IFRS Accounting Standards, there is no guidance on diluted EPS for mandatorily redeemable common shares. However, the discussion of mandatorily redeemable common shares in Section A.4.1 applies by extension to diluted EPS. That is, if the mandatorily redeemable common shares are not ordinary shares or potential ordinary shares as described in paragraph 5 of IAS 33, the shares are not included in diluted EPS. Note that mandatorily redeemable common shares are generally considered a liability under IFRS Accounting Standards.

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