A.6 Application of the Two-Class Method to Participating Securities
A.6.1 Scope
Under ASC 260-10-45-59A through 45-70 in U.S. GAAP, the two-class method of
calculating basic EPS applies to both debt and
equity instruments if they are participating
securities. However, paragraphs A13 and A14 of IAS
33 under IFRS Accounting Standards only require
the application of the two-class method to
participating equity instruments. See Chapter
5 for more information.
A.6.2 Participating Convertible Securities
Under U.S. GAAP, participating convertible securities are included in the
calculation of basic EPS by using the two-class
method. This is the case for both participating
convertible preferred stock and participating
convertible bonds. Under ASC 260-10-45-60A,
entities are precluded from applying the
if-converted method in calculating basic EPS for
these instruments.
As discussed above, under IFRS Accounting Standards, entities do not apply the
two-class method to participating debt
instruments. Thus, the two-class method of
calculating basic EPS does not apply to
participating convertible debt under IFRS
Accounting Standards. An entity would not adjust
the numerator or denominator for these instruments
in calculating basic EPS. Whether the two-class
method applies to participating convertible
preferred stock depends on its balance sheet
classification. The two-class method does not
apply if the participating convertible preferred
stock is classified as a liability but does apply
if the stock is classified as equity.
A.6.3 Detailed Guidance
Under U.S. GAAP, ASC 260 contains detailed application guidance on applying the
two-class method of calculating EPS. There is no
similar detailed application guidance under IFRS
Accounting Standards. As a result, the two-class
method of calculating EPS may be applied
differently under U.S. GAAP than it is under IFRS
Accounting Standards.