2.3 Trading (or Filing in Anticipation of Trading) in a Public Market

Entities whose common stock or potential common stock is not traded in a public market are not required to apply ASC 260 unless they have filed, or are in the process of filing, with a regulatory agency in preparation for the sale of common stock or potential common stock in a public market. Thus, an entity is not required to present EPS under ASC 260 when (1) its only securities that trade in a public market are nonconvertible debt securities1 and (2) it has not undertaken any filing in preparation for the sale of common stock or potential common stock in a public market. However, the entity could voluntarily present EPS data if it complies with all of the requirements of ASC 260.

The concept of “trades in a public market” under ASC 260 is relatively broad. ASC 260 specifically mentions that a public market may represent either a recognized stock exchange (i.e., the New York Stock Exchange [NYSE], the Nasdaq markets, or the American Stock Exchange [AMEX] in the United States) or an over-the-counter (OTC) market (also referred to as trading on the “pink sheets” in the United States), which may include securities quoted only locally or regionally.

It may be intuitive to think that the requirements of ASC 260 apply to public entities but not nonpublic entities. However, the ASC master glossary contains various definitions, including four definitions of public entity, two definitions of publicly traded company, a definition of publicly traded entity, and a definition of public business entity. While entities subject to the requirements of ASC 260 will often meet some or all of these definitions, the ASC 260 glossary does not link any of these definitions to the scope requirements. Therefore, it is important for an entity to apply the specific guidance in ASC 260-10-15 in determining whether it is subject to the requirements to present EPS.

In addition to applying to entities whose common stock or potential common stock trades in a public market, ASC 260 applies to any financial statements that will be included in any filing with a regulatory agency in preparation for the sale of those securities in a public market. Most commonly, in the United States, entities file a registration statement under the Securities Act of 1933 (the “Securities Act”) for the initial sale of common stock or potential common stock (e.g., an IPO). Once an entity has registered such securities, it becomes subject to the periodic reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). In such cases, EPS amounts must be presented in the filings under both the Securities Act and Exchange Act if the common stock or potential common stock trades (or, before registration, is intended to trade) in a public market.

2.3.1 Form 10 Registration Statements

Form 10 is a general form that is used to register a class of securities under Section 12(b) or 12(g) of the Exchange Act. Form 10 is not used to register securities for sale or resale under the Securities Act. For example, paragraph 1310.2 of the SEC's Division of Corporation Finance Financial Reporting Manual (FRM) indicates that, under Section 12(g) of the Exchange Act, any domestic issuer that is not a bank, bank holding company, or savings and loan holding company must file a Form 10 registration statement with the SEC if its total assets exceed $10 million and the securities are held by either “(1) 2,000 or more record holders or (2) 500 or more record holders who are not accredited investors.” An issuer that is a bank, bank holding company, or savings and loan holding company is required to register a class of equity securities if it has more than $10 million of total assets and the securities are held by 2,000 persons or more. Form 10 registration statements are also commonly filed in conjunction with certain spin-off transactions. In addition, any company, regardless of whether it is publicly held, may voluntarily file a Form 10 registration statement at any time.2

When a Form 10 registration statement becomes effective, a company becomes subject to the periodic reporting requirements of the Exchange Act, including the requirements to file annual reports on Form 10-K and quarterly reports on Form 10-Q, among other SEC reporting requirements. However, in a manner similar to the filing of a registration statement with the SEC under the Securities Act, the company must meet other requirements for its common stock to trade in the United States on an OTC market or a recognized stock exchange (i.e., NYSE, Nasdaq markets, or AMEX).

Basic and diluted EPS must be presented in a Form 10 registration statement when the common stock to be registered in the filing will trade in a public market (i.e., an OTC market or a recognized stock exchange). The only exception would be the filing of a Form 10 to complete a spin-off of the business operations of a larger entity that represents a carve-out from the parent. As discussed in Section 8.6.3.3, carve-out entities’ audited financial statements that are included in Form 10 registration statements typically do not include EPS, although pro forma EPS is typically presented outside the audited financial statements. Once the Form 10 registration statement is effective, EPS presentation is required in subsequent filings on Form 10-K and Form 10-Q.

Connecting the Dots

The requirement in ASC 260-10-15-2 for an entity to present EPS when it files with a regulatory agency in preparation for the sale of common stock or potential common stock in a public market is relatively broad. The requirement would include filings related to either (1) the offering of existing securities or (2) securities that are restricted for resale. Thus, even in such circumstances, EPS presentation is required in a Form 10 registration statement associated with common stock or potential common stock that will trade in a public market.

2.3.2 Termination of Registration of Common Stock

Entities may wish to terminate the registration of their common securities under Section 12(g) of the Exchange Act. However, even if the SEC reporting requirements under the Exchange Act are no longer applicable, an entity may still be required to present EPS because the requirements in ASC 260-10-15-2 for presentation of EPS do not include a requirement that the entity be registered with the SEC. Thus, the termination of registration of common stock with the SEC would not in itself cause an entity to no longer be required to present EPS. For example, entities with common stock or potential common stock that trade on an OTC market must present EPS even if those securities are not registered under the Exchange Act. An entity should consult with its legal advisers regarding the termination of registration of securities with the SEC.

Footnotes

An entity whose only securities that trade in a public market are debt securities that are convertible into common stock (i.e., convertible debt) is required to present EPS data under ASC 260.

This background discussion is only included to provide context for the discussion that follows. Section 12(b) of the Exchange Act also contains registration and reporting requirements. Entities should consult with their legal advisers regarding the requirements of U.S. securities laws.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.