Appendix B — Pro Forma EPS in SEC Filings

B.3 Calculating Pro Forma EPS

B.3.1 General

Article 11 and Section 3200 of the FRM include computational guidance related to pro forma EPS. However, there is no such computational guidance in U.S. GAAP.

SEC Regulation S-X, Rule 11-02(b)(9)(i), contains the following description of the pro forma EPS information that must be included in pro forma financial statements:

Historical and pro forma basic and diluted per share amounts based on continuing operations attributable to the controlling interests and the number of shares used to calculate such per share amounts must be presented on the face of the pro forma condensed statement of comprehensive income and only give effect to Transaction Accounting Adjustments and Autonomous Entity Adjustments.

In addition to describing the pro forma EPS information to be included in pro forma financial statements, SEC Regulation S-X, Rule 11-02(b)(9)(ii), discusses the calculation of pro forma EPS and states:

The number of shares used in the calculation of the pro forma per share amounts must be based on the weighted average number of shares outstanding during the period adjusted to give effect to the number of shares issued or to be issued to consummate the transaction, or if applicable whose proceeds will be used to consummate the transaction as if the shares were outstanding as of the beginning of the period presented. Calculate the pro forma effect of potential common stock being issued in the transaction (e.g., a convertible security), or the proceeds of which will be used to consummate the transaction, on pro forma earnings per share in accordance with U.S. GAAP or IFRS-IASB, as applicable, as if the potential common stock were outstanding as of the beginning of the period presented.

Under Article 11, an entity will generally include in the denominator of pro forma EPS only those common shares whose proceeds are being reflected in pro forma adjustments in the income statements, such as proceeds used for debt repayment or business acquisitions. However, an entity may be required to reflect in its pro forma EPS calculation incremental shares arising from an offering whose proceeds are assumed to pay a distribution/dividend to shareholders, even if such a distribution is not reflected in the pro forma income statement. See further discussion in Section B.3.2.

Regardless of the reason for presenting or disclosing pro forma EPS in a filing with the SEC, the pro forma EPS amounts should be accompanied by transparent disclosure of how such amounts were calculated.

Connecting the Dots

The presentation of pro forma EPS should not alter in any way the calculations of historical basic and diluted EPS under ASC 260. That is, calculations of basic and diluted EPS under ASC 260 should not incorporate any of the assumptions about the use of offering proceeds or other transactions that have not yet occurred but that may trigger a requirement to present or disclose pro forma EPS. Rather, transactions affecting EPS should be reflected in EPS calculations under ASC 260 only after they have occurred.

B.3.2 Distributions From the Proceeds of an Offering

The objective of calculating pro forma EPS is to include an additional number of common shares in the denominator to reflect that the entity would have to raise proceeds through the issuance of common stock to fund dividends that exceed current-period earnings. That is, pro forma EPS should be calculated by including an incremental number of common shares (not to exceed the total number of common shares being offered) that, on the basis of the offering price, would be needed to pay the portion of the dividend that exceeds earnings. See Example B-1 for an illustration.

B.3.3 Change in Capitalization at or Before Closing of an IPO

When outstanding securities, such as convertible securities or restricted share-based units, will be converted into common stock in conjunction with an IPO, and that conversion will occur after the latest balance sheet presented and result in a material reduction of EPS (excluding the effects of the offering), pro forma EPS amounts should reflect the conversion of the securities into common stock. The pro forma EPS amounts should not, however, reflect any additional shares of common stock being offered in the IPO.

The nature of the pro forma adjustments to the historical EPS amounts will depend on the specific facts and circumstances. Such adjustments may include adjustments to the numerator in addition to the inclusion of additional common shares in the denominator. If the security to be converted is a participating security, an entity would be required to adjust the numerator to remove the effects of such participation from the historical EPS amounts. Moreover, for convertible securities, the numerator for basic EPS would need to be adjusted to remove any interest or dividends that reduced income available to common stockholders. A similar type of adjustment may also be required in the calculation of pro forma diluted EPS. However, in some cases, diluted EPS and pro forma diluted EPS will be the same. See Example B-2 for an illustration.

B.3.4 Use of Proceeds From Offering of Convertible Securities to Extinguish Preferred Stock or Debt

The pro forma adjustments required under SAB Topic 3.A will depend on the circumstances associated with the existing security being extinguished, the offered security, and other equity or participating securities in the entity’s capital structure. In certain situations, the pro forma adjustments will involve the initial application, alteration, or cessation of the two-class method of calculating EPS. This may be the case when (1) the extinguished security was a participating security, (2) the offered security is a participating security, or (3) the entity has other participating securities or multiple classes of common stock. Regardless of the facts and circumstances related to the extinguished security, the offered security, or the other equity or participating securities in the entity’s capital structure, the following are always true in the calculation of pro forma EPS:

The pro forma adjustments to the denominator as a result of the offered security should be limited to the portion of the offering proceeds that will be used to extinguish the existing security. This amount will be determined by considering both the redemption price of the existing security and the proceeds that must be raised in the offering to repay that redemption price. The quantity of securities needed to pay the redemption price of the existing security should be based on the offering price in the registration statement. Additional proceeds raised in the offering that will be used for general corporate purposes do not affect the calculations of pro forma EPS.
The pro forma adjustments should be calculated in a manner that reflects only the time during which the existing security or offered security was (or would be) outstanding during the financial reporting period. For example, if an entity is retiring nonconvertible debt that was issued at the beginning of the second quarter of a fiscal year with the proceeds from an offering of convertible securities at or after the end of the fiscal year, the adjustments to the numerator would only reflect interest expense on the existing debt for three quarters. Similarly, the adjustments to the numerator and the incremental potential common shares added to the denominator of the calculation of pro forma diluted EPS under the if-converted method would also be weighted for three quarters during the annual period.

The table below discusses various other matters not specifically addressed in the SEC’s computational guidance that may be relevant to the calculation of pro forma EPS under SAB Topic 3.A.1

Table B-1

Additional Matter	Additional Considerations
The existing security that is being extinguished was accounted for at fair value through earnings.	The mark-to-market adjustments should be reversed since they would not have been recorded if the existing security was extinguished.
The existing security that is being extinguished contained an embedded derivative that was separately recognized under ASC 815.	The mark-to-market adjustments on the embedded derivative should be reversed since they would not have been recorded if the existing security was extinguished.
The existing security that is being extinguished was preferred stock that was classified in temporary equity and remeasured to its redemption amount.	The adjustments previously recognized for changes in the redemption amount should be reversed since they would not have been recorded if the existing security was extinguished (i.e., the amounts that reduced income available to common stockholders would be added back to the numerator).
The existing security allowed for conversion to be settled in cash or common stock.	The adjustments to historical EPS should be based on an assumption that the security would be share-settled.
The offered security will be accounted for at fair value through earnings.	If potential mark-to-market adjustments on the offered security that will be recognized after the issuance of the security are not included in the calculation of pro forma EPS amounts for the period after the issuance of the offered security, the disclosure should indicate that these adjustments are not included in the calculation of pro forma EPS because such amounts are not reasonably determinable.
The offered security will contain an embedded derivative that must be separated under ASC 815.	Management should estimate the initial fair value of the embedded derivative to calculate the interest expense or dividends on the host contract for the offered security under the interest method. If potential mark-to-market adjustments on the embedded derivative that will be recognized after the issuance of the security are not included in the calculation of pro forma EPS amounts for the period after the issuance of the offered security, the disclosure should indicate that these adjustments are not included in the calculation of pro forma EPS because such amounts are not reasonably determinable.
The interest or dividends on the offered security are variable.	The entity should use judgment on the basis of the specific terms and other GAAP. If the variability is based solely on a market index, the relevant spot index should be used.
The interest or dividends on the offered security are at an increasing rate or contain other unique terms.	The entity should consider the interest or dividend terms in the offering document in determining the application of the interest method.
The offered security is puttable or callable.	Such calls or puts should not be considered to result in a life of the offered security that is shorter than the period during which the existing security was outstanding. Entities should use judgment and consider the requirements of other GAAP in evaluating whether the puts or calls affect the interest or dividend yield on the offered security.
The offered security will need to be classified in temporary equity and remeasured to its redemption amount.	In assessing the impact of potential redemption amount adjustments on the calculation of pro forma EPS, an entity will need to use judgment and consider the facts and circumstances as well as its selected accounting policies under ASC 480-10-S99-3A. For example: Common stock redeemable at fair value does not affect the reported amounts of EPS. Preferred stock redeemable at a fixed amount greater than the issuance price contains a discount that affects the amount of dividends on the preferred stock. If the redemption price is variable, the entity should consider the nature of the variability to determine the redemption amount adjustments or should disclose that such an estimate is not reasonably determinable.
The offered security is a convertible security for which a conversion may be settled in cash or stock.	Entities are required to assume share settlement when calculating pro forma EPS.
The entity historically applied the two-class method as a result of the existence of other participating securities or multiple classes of common stock (i.e., in the absence of the existing security or offered security, the two-class method of EPS is required).	The adjustments to historical basic and diluted EPS arising from the extinguishment of the existing security and the offered security may affect the historical application of the two-class method (e.g., the allocation of undistributed earnings); thus, an entity will be required to take additional considerations into account in calculating pro forma EPS.

B.3.5 Changes in Tax Status in Conjunction With an IPO

The financial statements presented in a registration statement on Form S-1 for the periods in which an entity was a nontaxable entity should not be restated for the effects of income taxes. Rather, as discussed in paragraph 3410.1 of the FRM, the entity should provide pro forma disclosures to illustrate the effect of income taxes on those years in accordance with Article 11. Section 3270 of the FRM states that the tax rate used for the pro forma calculations should normally equal the “statutory rate in effect during the periods for which the pro forma income statements are presented.”

For more information about the implications of a change in tax status, see Deloitte’s Roadmap Income Taxes. Note that there are several ways in which an entity’s tax and legal structure may change as a result of the IPO process, all of which may have unique impacts on income tax measurement, presentation, and disclosures. Management should consult with tax advisers in determining the income tax implications of such changes well in advance of the IPO.

Footnotes

The matters discussed below may also be relevant to certain changes in capitalization in conjunction with an IPO.

B.4 Examples

B.4.1 Distributions From the Proceeds of an Offering

Example B-1

Assume the following:

Company A, a calendar-year-end entity, plans to complete an IPO in June 20X9.
Before its IPO, A had 5,000 shares of common stock outstanding.
In the IPO, A expects to issue 1 million shares of common stock at an expected offering price of $100 per share.
For the year ended December 31, 20X8, A has net income of $100,000.
On December 31, 20X8, A declares a dividend of $1,000 per share to its owners (i.e., a total dividend of $5 million). No other dividends are paid or declared in 20X8.

Because the dividends for 20X8 exceed A’s net income for this year, the SEC staff would consider the dividend payments to have been made in contemplation of A’s planned IPO. Accordingly, in the Form S-1 filing for its IPO, A should present pro forma EPS outside the financial statements for the year ended December 31, 20X8, and for the three months ended March 31, 20X9, that reflects an additional 49,000 common shares in the denominator of both basic and diluted EPS.

The incremental number of shares of common stock included in the denominator is calculated as follows:

Since the 49,000 incremental common shares required for the pro forma EPS disclosure do not exceed the common shares being offered in the IPO, all of the incremental shares should be included in the calculation of pro forma EPS.

B.4.2 Change in Capitalization at or Before Closing of an IPO

Example B-2

Assume the following:

Company B, a calendar-year-end entity, plans to complete an IPO in March 20X5. The latest financial statements included in the Form S-1 registration statement are as of and for the year ended December 31, 20X4.
Company B has the following outstanding securities:
- 100,000 shares of common stock.
- 100,000 shares of participating convertible preferred stock that are automatically converted into common shares upon the occurrence of an IPO (the “preferred shares”). The aggregate liquidation preference of the preferred shares is $1 million. Each preferred share is convertible into one share of common stock. The preferred shares receive dividends, on a cumulative basis, at an annual rate of 8 percent (or $80,000 per annum). In addition, after such payments, the holders are entitled to participate in dividends with common shareholders on a 35:65 basis and such participation is determined on the basis of the number of shares of common stock issuable on conversion of the preferred shares.
- Options that allow the holders to purchase 50,000 shares of common stock that are not automatically exercised upon the occurrence of an IPO. The options do not represent participating securities.
For the year ended December 31, 20X4:
- Company B reports net income of $500,000.
- No dividends are paid or declared on common stock.
- Under the treasury stock method, the options result in 25,000 incremental shares.

Company B’s calculation of EPS for the year ended December 31, 20X4, is as follows:

Basic EPS:

Diluted EPS:

Diluted EPS is presented under the if-converted method since it is more dilutive than the two-class method of calculating diluted EPS.

(a) Two-class method:

(b) If-converted method:

Company B calculates pro forma EPS for the year ended December 31, 20X4, which would be presented outside the financial statements, as follows:

Pro Forma Basic EPS:

Pro Forma Diluted EPS:

Note that diluted pro forma EPS is not calculated under the two-class method because, after the conversion of the preferred shares, there are no remaining participating securities.

B.4.3 Use of Proceeds From Offering of Convertible Securities to Extinguish Preferred Stock or Debt

Example B-3

Assume the following:

Company C is offering $500 million of convertible preferred stock (the “preferred stock”).
The “use of proceeds” section in the registration statement for the offering states that the proceeds from issuance of the preferred stock will be used to redeem C’s outstanding senior secured notes (the “notes”) and for general corporate purposes.
Key terms and characteristics of the notes include:
- The notes are not convertible into common stock.
- The notes are not participating securities.
- The notes are accounted for at amortized cost.
- The current amortized cost of the notes is $245 million.
- The outstanding principal amount of the notes is $250 million.
- The notes do not contain any embedded derivatives that must be accounted for separately.
- The notes contain an embedded call option that allows C to redeem them at any time for the principal amount plus a make-whole premium. The current redemption amount is $260 million. Therefore, the redemption will result in a pretax extinguishment loss of $15 million or $12 million, net of tax.
- The notes are outstanding during the entire year ended December 31, 20X1.
- Interest expense on the notes during the year ended December 31, 20X1, net of tax, is $9 million.
Key terms and characteristics of the preferred stock include:
- The conversion option in the preferred stock must be settled in common stock.
- Upon full conversion, C would be required to issue 8 million shares of common stock.
- The conversion option in the preferred stock is not “in-the-money” as of the issuance date.
- The preferred stock is not a participating security.
- Dividends on the preferred stock, which are cumulative and not tax-deductible, accrue at a rate of 3.5 percent per annum.
- The preferred stock will be classified in permanent equity.
- The preferred stock will not contain any embedded derivatives that must be accounted for separately.
Before the offering, C’s capital structure consists solely of the notes, common stock, and options to purchase common stock, which are not participating securities. For the year ended December 31, 20X1, on a weighted-average basis, C has 10 million shares of common stock outstanding and 1 million incremental potential common shares, as calculated under the treasury stock method.
Company C reports net income of $50 million for the year ended December 31, 20X1.

Company C presents basic and diluted EPS for the year ended December 31, 20X1, as follows:

Basic EPS:

Diluted EPS:

The adjustments to C’s historical basic and diluted EPS to arrive at pro forma basic and diluted EPS for the year ended December 31, 20X1, are as follows:

EPS	Nature of Pro Forma Adjustments
Basic	Numerator: The numerator in the historical calculation of basic EPS should be decreased by $12.1 million, calculated as the $12 million loss on extinguishment of the notes, net of tax, plus the $100,000 difference between interest on the notes and dividends on the preferred stock, which is calculated as follows: Denominator: There are no adjustments to the denominator in the historical calculation of basic EPS.
Diluted	Numerator: The numerator in the historical calculation of diluted EPS should be decreased by $3 million, representing the $12 million loss on the extinguishment of debt, net of tax, less the add-back of $9 million of interest on the notes, net of tax. The dividends on the preferred stock do not affect the numerator for pro forma diluted EPS because the preferred stock is dilutive under the if-converted method. Denominator: The denominator in the historical calculation of diluted EPS should be increased by 4.16 million shares of common stock, representing the number of shares of common stock to be issued from the application of the if-converted method to $260 million of preferred stock (i.e., 8 million common shares issuable upon full conversion × [$260 million ÷ $500 million]). No additional adjustments are necessary since the notes are not convertible into common stock.

EPS

Nature of Pro Forma Adjustments

Basic

Numerator:

The numerator in the historical calculation of basic EPS should be decreased by $12.1 million, calculated as the $12 million loss on extinguishment of the notes, net of tax, plus the $100,000 difference between interest on the notes and dividends on the preferred stock, which is calculated as follows:

Denominator:

There are no adjustments to the denominator in the historical calculation of basic EPS.

Diluted

Numerator:

The numerator in the historical calculation of diluted EPS should be decreased by $3 million, representing the $12 million loss on the extinguishment of debt, net of tax, less the add-back of $9 million of interest on the notes, net of tax. The dividends on the preferred stock do not affect the numerator for pro forma diluted EPS because the preferred stock is dilutive under the if-converted method.

Denominator:

The denominator in the historical calculation of diluted EPS should be increased by 4.16 million shares of common stock, representing the number of shares of common stock to be issued from the application of the if-converted method to $260 million of preferred stock (i.e., 8 million common shares issuable upon full conversion × [$260 million ÷ $500 million]). No additional adjustments are necessary since the notes are not convertible into common stock.

The calculation of pro forma basic and diluted EPS for the year ended December 31, 20X1, which would be presented outside the financial statements, is as follows:

Pro Forma Basic EPS:

Pro Forma Diluted EPS:

Example B-4

Assume the following:

Company D is offering 100 million common shares (the “common stock”) and detachable warrants to purchase 100 million common shares (the “warrants”). On the basis of the offering prices, D expects to raise $900 million.
The “use of proceeds” section in the registration statement for the offering states that the proceeds from issuance of common stock and warrants will be used to redeem all of D’s outstanding senior secured debentures (the “debentures”) and an amount of outstanding convertible preferred stock (the “preferred stock”) that is tendered by the holders in accordance with the terms of a tender offer but not to exceed $500 million. Company D expects that the tender offer will result in the repurchase of half of the outstanding preferred stock for $500 million. The anticipated purchase price is equal to the carrying amount of the preferred stock to be redeemed.
Key terms and characteristics of the debentures include:
- The debentures are not convertible into common stock.
- The debentures are not participating securities.
- The debentures are accounted for at amortized cost.
- The current amortized cost of the debentures is $400 million.
- The outstanding principal amount of the debentures is $400 million.
- The debentures do not contain any embedded derivatives that must be accounted for separately.
- The debentures contain an embedded call option that allows D to redeem them at any time after December 31, 20X2, at the outstanding principal amount.
- The debentures were outstanding during the entire year ended December 31, 20X2.
- Interest expense on the debentures during the year ended December 31, 20X2, net of tax, was $18 million.
Key terms and characteristics of the preferred stock include:
- The conversion option in the preferred stock must be settled in common stock.
- Upon full conversion, D would be required to issue 50 million shares of common stock.
- The preferred stock is not in-the-money on the issuance date.
- The preferred stock is not a participating security.
- Dividends on the preferred stock, which are cumulative and not tax-deductible, accrue at a rate of 6 percent per annum.
- The preferred stock is classified in permanent equity.
- The preferred stock does not contain any embedded derivatives that must be accounted for separately.
- The aggregate liquidation preference of the preferred stock is $1 billion.
- The preferred stock is outstanding during the entire year ended December 31, 20X2.
Key terms and characteristics of the warrants include:
- The warrants are not participating securities.
- The exercise price of the warrants will be set at a 35 percent premium to the market price of D’s common stock.
- At no point during the year ended December 31, 20X2, did the fair value of D’s common stock exceed the exercise price of the warrants.
Before the offering, D’s capital structure consists solely of the debentures, preferred stock, common stock, and options to purchase common stock, which are not participating securities. For the year ended December 31, 20X2, on a weighted-average basis, D has 300 million shares of common stock outstanding and 10 million incremental potential common shares related to the options to purchase common stock, as calculated under the treasury stock method.
Company D reports net income of $500 million for the year ended December 31, 20X2.

Company D presents basic and diluted EPS for the year ended December 31, 20X2, as follows:

Basic EPS:

Diluted EPS:

The adjustments that D makes to its historical basic and diluted EPS to arrive at pro forma basic and diluted EPS for the year ended December 31, 20X2, are as follows:

EPS	Nature of Pro Forma Adjustments
Basic	Numerator: The numerator in the historical calculation of basic EPS should be increased by $48 million, calculated as follows: Denominator: The denominator in the historical calculation of basic EPS should be increased by 100 million for the common shares to be issued in the offering. Note that the issuance of the warrants does not affect the calculation of pro forma basic EPS since the warrants do not represent participating securities.
Diluted	Numerator: The numerator in the historical calculation of diluted EPS should be increased by $18 million, representing the add-back of interest, net of tax, on the notes. No adjustment is needed for dividends on the preferred stock because the numerator in the historical calculation of diluted EPS included an add-back for such dividends under the if-converted method. Denominator: The denominator in the historical calculation of diluted EPS should be increased by 75 million shares of common stock, calculated as follows: There is no incremental dilutive impact of the warrants to be issued in the offering because they are out-of-the-money.

EPS

Nature of Pro Forma Adjustments

Basic

Numerator:

The numerator in the historical calculation of basic EPS should be increased by $48 million, calculated as follows:

Denominator:

The denominator in the historical calculation of basic EPS should be increased by 100 million for the common shares to be issued in the offering. Note that the issuance of the warrants does not affect the calculation of pro forma basic EPS since the warrants do not represent participating securities.

Diluted

Numerator:

The numerator in the historical calculation of diluted EPS should be increased by $18 million, representing the add-back of interest, net of tax, on the notes. No adjustment is needed for dividends on the preferred stock because the numerator in the historical calculation of diluted EPS included an add-back for such dividends under the if-converted method.

Denominator:

The denominator in the historical calculation of diluted EPS should be increased by 75 million shares of common stock, calculated as follows:

There is no incremental dilutive impact of the warrants to be issued in the offering because they are out-of-the-money.

The calculation of pro forma basic and diluted EPS for the year ended December 31, 20X2, which would be presented outside the financial statements, is as follows:

Pro Forma Basic EPS:

Pro Forma Diluted EPS:

Example B-5

Assume the following:

Company E is offering $500 million of convertible notes (the “notes”).
The “use of proceeds” section in the registration statement for the offering states that the proceeds from issuance of the notes will be used to retire E’s outstanding preferred stock (the “preferred stock”).
Key terms and characteristics of the preferred stock include:
- There are 500,000 shares of preferred stock outstanding.
- Each share of preferred stock has a liquidation preference of $1,000 per share.
- The preferred stock is not convertible.
- Dividends on the preferred stock, which are cumulative and not tax-deductible, accrue at a rate of 6 percent per annum. The preferred stock also participates in dividends declared on E’s common stock on a 1:1 basis, calculated on the basis of the number of shares outstanding.
- The preferred stock is classified in permanent equity.
- The preferred stock does not contain any embedded derivatives that must be accounted for separately.
- Company E has a call option that allows it to redeem the preferred stock for $500 million.
- The preferred stock is recorded at $500 million on E’s balance sheet.
- The preferred stock is outstanding during the entire year ended December 31, 20X2.
Key terms and characteristics of the notes include:
- The notes are convertible into common stock at a conversion rate of 50 shares for each 1,000 principal amount (or 25 million shares of common stock upon full conversion).
- The notes bear interest at an annual rate of 3.375 percent. Interest on the notes is tax-deductible (assume a 20 percent tax rate).
- The notes also participate in dividends paid on common stock on an as-converted basis.
- The notes will be accounted for at amortized cost.
- The notes will not contain any embedded derivative that must be accounted for separately.
Before the offering, E’s capital structure consists solely of the preferred stock, common stock, and options to purchase common stock, which are not participating securities. For the year ended December 31, 20X2, on a weighted-average basis, E has 150 million shares of common stock outstanding and 5 million incremental potential common shares related to the options to purchase common stock, as calculated under the treasury stock method.
Company E reports net income of $250 million for the year ended December 31, 20X2.
Company E does not declare any dividends on common stock during the year ended December 31, 20X2.
Company E is subject to the two-class method because the preferred stock is a participating security.

Company E presents basic and diluted EPS for the year ended December 31, 20X2, as follows:

Basic EPS:

Diluted EPS:

The adjustments that E makes to its historical basic and diluted EPS to arrive at pro forma basic and diluted EPS for the year ended December 31, 20X2, are as follows:

EPS	Nature of Pro Forma Adjustments
Basic	Numerator: The numerator in the historical calculation of basic EPS should be decreased by $16,554,817, calculated as follows: The extinguishment of the preferred stock will not result in an adjustment to retained earnings because the redemption amount and the carrying amount of the preferred stock are the same; therefore, no adjustment is necessary for the extinguishment on the basis of the facts in this example. Denominator: There are no adjustments to the denominator in the historical calculation of basic EPS.
Diluted	Numerator: The numerator in the historical calculation of diluted EPS should be decreased by $15,639,827, calculated as follows: Denominator: There are no adjustments to the denominator in the historical calculation of diluted EPS because EPS is more dilutive under the two-class method than under the if-converted method.

EPS

Nature of Pro Forma Adjustments

Basic

Numerator:

The numerator in the historical calculation of basic EPS should be decreased by $16,554,817, calculated as follows:

The extinguishment of the preferred stock will not result in an adjustment to retained earnings because the redemption amount and the carrying amount of the preferred stock are the same; therefore, no adjustment is necessary for the extinguishment on the basis of the facts in this example.

Denominator:

There are no adjustments to the denominator in the historical calculation of basic EPS.

Diluted

Numerator:

The numerator in the historical calculation of diluted EPS should be decreased by $15,639,827, calculated as follows:

Denominator:

There are no adjustments to the denominator in the historical calculation of diluted EPS because EPS is more dilutive under the two-class method than under the if-converted method.

The calculation of pro forma basic and diluted EPS for the year ended December 31, 20X2, which would be presented outside the financial statements, is as follows:

Pro Forma Basic EPS:

Pro Forma Diluted EPS:

Pro forma diluted EPS is presented under the two-class method since it is more dilutive than the if-converted method.

(a) Two-class method:

(b) If-converted method: