A.5 Treatment of Mandatorily Convertible Instruments
The basic EPS implications of mandatorily convertible instruments are not
directly addressed in U.S. GAAP. However, if the
instrument is a participating security, an entity
should apply the two-class method of calculating
EPS. If the instrument is not a participating
security, there is no impact on basic EPS. For
diluted EPS purposes, if the instrument is a
participating security, the more dilutive of the
two-class method or if-converted method is
applied. If the instrument is not a participating
security, an entity would apply the if-converted
method to calculate diluted EPS if the effect is
dilutive See Sections 3.3.2.2
and 6.4 for more
information.
Under IFRS Accounting Standards, entities do not apply the two-class method to
mandatorily convertible instruments. Instead, paragraph 23 of IAS 33 indicates that
entities should consider the shares outstanding in the calculation of basic EPS and
diluted EPS from the date the contract is entered into.
If the instrument is participating, the EPS presentation required under U.S.
GAAP differs from that required under IFRS Accounting Standards, since under U.S.
GAAP an entity applies the two-class method to calculate both basic and diluted EPS,
while under IFRS Accounting Standards an entity considers the shares outstanding.
U.S. GAAP and IFRS Accounting Standards also differ when the instrument is not
participating. This is because under U.S. GAAP, entities make no adjustment to the
numerator or denominator in calculating basic EPS, while under IFRS Accounting
Standards the shares are considered to be outstanding, which increases the
denominator. The net result is that basic EPS will be lower under IFRS Accounting
Standards than under U.S. GAAP. For diluted EPS, results under U.S. GAAP will also
differ from those under IFRS Accounting Standards, since under U.S. GAAP an entity
will apply the if-converted method (thereby increasing outstanding shares and
removing from the numerator any income statement impact from the mandatorily
convertible instrument), while under IFRS Accounting Standards the shares are
considered outstanding and no adjustment is made to the numerator.