Chapter 2 — Scope
Chapter 2 — Scope
2.1 General
ASC 260-10
Entities
15-2 The guidance in the
Earnings per Share Topic requires presentation of earnings
per share (EPS) by all entities that have issued common
stock or potential common stock (that is, securities such as
options, warrants, convertible securities, or contingent
stock agreements) if those securities trade in a public
market either on a stock exchange (domestic or foreign) or
in the over-the-counter market, including securities quoted
only locally or regionally. This Topic also requires
presentation of EPS by an entity that has made a filing or
is in the process of filing with a regulatory agency in
preparation for the sale of those securities in a public
market.
15-3 The guidance in this Topic does not require presentation of EPS for investment companies that comply with the requirements of Topic 946 or in statements of wholly owned subsidiaries. Any entity that is not required to present EPS in its financial statements that chooses to present EPS in its financial statements shall do so in accordance with the provisions of this Topic.
ASC 260 establishes guidance on calculating and presenting EPS related to common
stock and potential common stock. As noted above in ASC 260-10-15-2 and 15-3, when
the following two conditions are met, an entity other than an investment company is
required to present EPS in its financial statements:
-
The entity has outstanding common stock or potential common stock.
-
The entity’s common stock or potential common stock trades “in a public market” or the entity “has made a filing or is 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.”
Entities subject to ASC 260 must present or disclose, for each financial reporting period, basic EPS and diluted EPS amounts for income from continuing operations, income from discontinued operations, and net income. Entities may voluntarily disclose other per-share metrics in certain circumstances (see further discussion in Section 9.2.3).
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.
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
1
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.
2
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.