2.2 Common Stock and Potential Common Stock

ASC 260-10-20 defines common stock as “stock that is subordinate to all other stock of the issuer.” Further, potential common stock is defined as a “security or other contract that may entitle its holder to obtain common stock during the reporting period or after the end of the reporting period.” Because the valuation of securities that are considered potential common stock is largely derived from the value of the related common stock, changes in the value of those securities tend to reflect changes in the value of the common stock. Examples of financial instruments that involve potential common stock include share-based payment arrangements, warrants, and securities convertible into common stock. Preferred stock would not meet the definition of potential common stock unless it is convertible into common stock.