Chapter 1 — Overview
Chapter 1 — Overview
1.1 Introduction
This Roadmap discusses the calculation, presentation, and disclosure of EPS in
an entity’s financial statements. Under ASC 260,
entities are required to present or disclose basic
EPS and diluted EPS amounts for income from
continuing operations, income from discontinued
operations, and net income for each class of
common stock for each financial reporting period
presented. Basic EPS is calculated as income
available to common stockholders divided by the
weighted-average number of common shares
outstanding, and diluted EPS includes potential
common stock that, if actually issued, would
dilute basic EPS.
Section 1.2 is a brief history of the
EPS-related standards that were issued before the codification of the current
guidance in ASC 260.
1.2 History of EPS Guidance
In 1969, the AICPA issued Opinion 15, the purpose of which was to
ensure that EPS information was “computed on a consistent basis and presented in the
most meaningful manner.” As discussed in Opinion 15, before entities were required
to present EPS information, EPS data were commonly used “in evaluating the past
operating performance of a business, in forming an opinion as to its earnings
potential and in making investment decisions.” Further, such data were commonly
presented in “prospectuses, proxy material, and reports to stockholders.”
After the AICPA issued numerous accounting interpretations related
to the application of Opinion 15, domestic and international standard setters began
to pursue the convergence of their accounting standards on EPS. The International
Accounting Standards Committee (IASC) issued a statement of principles on EPS in
1993 to provide an appropriate framework under which EPS data of entities globally
can be calculated.
In the years after the issuance of the IASC’s statement of
principles on EPS, the FASB and IASC worked together to initiate a consistent
international approach to the determination and subsequent presentation of EPS.
Because the rules and regulations of foreign jurisdictions varied with respect to
determining earnings, the diversity in international practice in this area was not
the focus of the convergence efforts. Rather, the FASB and IASC believed that a
consistently determined denominator would help significantly improve EPS
comparability for entities globally. Thus, much of the standard setting at this time
focused on developing a consistent framework for determining the denominator in the
computation of EPS.
In 1997, the FASB and IASC concurrently issued Statement 128 and IAS 33, respectively; the guidance in these EPS standards was substantially converged. Since the issuance of Statement 128, the FASB’s Emerging Issues Task Force (EITF) has deliberated and reached consensus on a number of specific EPS topics. The guidance in Statement 128 and in these subsequent interpretations is codified in ASC
260. In addition, the FASB has issued several ASUs to amend the EPS guidance in ASC
260.
The FASB and International Accounting Standards Board
(IASB®) have not fully converged their accounting guidance on the
presentation and disclosure of EPS. See Appendix A for a table comparing the EPS
guidance in U.S. GAAP with that in IFRS® Accounting Standards.
1.3 Recent Changes in EPS Guidance
In August 2020, the FASB issued ASU
2020-06, which simplifies the accounting for
convertible instruments and equity-linked financial instruments in
addition to amending the EPS guidance in ASC 260. Significant
amendments that ASU 2020-06 makes to the EPS guidance include the
following:
- 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.
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).