1.3 Recent Changes in EPS Guidance
Further, the FASB also issued ASU 2021-04 in May
2021, to address an issuer’s accounting for certain modifications or
exchanges of freestanding equity-classified written call options.
See Section
3.2.6.4 for more information about the accounting
for modifications or exchanges of freestanding equity-classified
written call options.
In this Roadmap, it is assumed that an entity has
adopted both ASU 2020-06 and ASU 2021-04.
In addition to the FASB guidance discussed above, other recent guidance that
affects EPS includes the SEC’s (1) May 2020 Final Rule
33-10786 (see Section B.1), which
changes the pro forma presentation and disclosure requirements,
including those related to pro forma EPS, and (2) November 2020
Final
Rule 33-10890, which amends SEC Regulation
S-X (the guidance in this rule affects various chapters of this
Roadmap).
- All convertible instruments not issued
at a substantial premium, and for which the embedded
conversion option does not need to be bifurcated
under ASC 815-15, constitute a single unit of
account. Therefore, the numerator in the calculation
of EPS is no longer affected by beneficial
conversion features or the amortization of debt
discounts on convertible instruments previously
accounted for under the cash conversion subsections
of ASC 470-20.
- The if-converted method applies to the
calculation of diluted EPS for all convertible
instruments. The ASU modifies the use of the
if-converted method for convertible debt instruments
for which the principal amount must be settled in
cash upon conversion, requiring entities to
calculate diluted EPS in a manner consistent with
the application of the treasury stock method.
- Entities cannot overcome the
presumption of share settlement for contracts that
may be settled in cash or stock. However, one
exception is provided for share-based payment awards
that are classified as liabilities.
- An average share price must be used to
calculate the impact on diluted EPS for instruments
for which the entity’s share price may affect (1)
the exercise price of the instrument or (2) the
number of shares that may be issued to settle the
instrument.
- The numerator in the calculation of
basic EPS should be adjusted to reflect the value of
a down-round feature in an equity-classified
freestanding financial instrument or an
equity-classified preferred stock instrument when
the down-round feature is triggered. An entity would
not adjust the numerator when a down-round feature
is triggered in a convertible debt instrument.
- When an entity must adjust the
numerator to remove the earnings effect of the
change in fair value of an asset or liability that
is presumed to be share-settled for EPS purposes,
the number of incremental shares included in the
denominator of a year-to-date EPS would be
calculated on the basis of the year-to-date weighted
average of the number of incremental shares included
in each calculation of diluted EPS on a quarterly
basis.
For more information about ASU 2020-06, including the transition and disclosure requirements that apply to the period of adoption, see Deloitte’s August 5, 2020, Heads Up.