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 260-10-20 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.
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.
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.