4.1 Background

ASC 260-10

Diluted EPS

10-2 The objective of diluted EPS is consistent with that of basic EPS — to measure the performance of an entity over the reporting period — while giving effect to all dilutive potential common shares that were outstanding during the period.

Computation of Diluted EPS

45-16 The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In computing the dilutive effect of convertible securities, the numerator is adjusted in accordance with the guidance in paragraph 260-10-45-40. Adjustments also may be necessary for certain contracts that provide the issuer or holder with a choice between settlement methods. See Example 1 (paragraph 260-10-55-38) for an illustration of this guidance.

As noted above, diluted EPS is a per-share performance measure that includes (1) outstanding common shares and (2) “additional common shares that would have been outstanding if the dilutive potential common shares had been issued.” In calculating diluted EPS, an entity assumes that all dilutive potential common shares within its capital structure were outstanding during the reporting period and that net income (the numerator) was calculated by using a consistent assumption. The complexity of calculating diluted EPS will vary depending on the nature of an entity’s capital structure.

The graphic below illustrates the most common types of contractual arrangements that may involve potential common shares. See Table 4-1 for a summary of the methods applied to various types of contracts to determine the dilutive impact on EPS.

In calculating diluted EPS, an entity leverages the calculation of basic EPS. Specifically, an entity calculates diluted EPS by making various adjustments to the numerator and denominator in the calculation of basic EPS to reflect the impact of potential common shares. To do so, the entity uses one of four methods — the treasury stock method, the reverse treasury stock method, the if-converted method, or the contingently issuable share method. The calculation of diluted EPS may also need to reflect adjustments to the numerator for convertible instruments and contracts whose accounting classification differs from their EPS treatment (e.g., contracts classified as assets or liabilities that are considered share-settled for diluted EPS purposes). Entities with more complex capital structures may also need to apply the two-class method in calculating diluted EPS. The graphic below illustrates the types of adjustments to the numerator and denominator that an entity may be required to make when calculating diluted EPS.

As discussed in Chapter 2, diluted EPS must be presented or disclosed any time basic EPS is presented or disclosed. For entities that have multiple classes of common stock, diluted EPS must be presented on the face of the income statement for each class of common stock. As discussed in Section 8.7.1, if an entity reports a discontinued operation, it must present diluted EPS from continuing operations and net income on the face of the income statement and must present on the face of the income statement, or disclose in the notes, diluted EPS for discontinued operations. For entities with NCIs, diluted EPS is calculated on the basis of income attributable to the parent (i.e., income attributable to NCIs is excluded from the calculation of diluted EPS). See further discussion in Sections 8.7.2 and 8.8.

The discussion in this chapter is generally in the context of an entity that presents only one amount of diluted EPS (i.e., the entity does not have any discontinued operations). Unless otherwise noted, in this chapter, “net income” encompasses both net income and net loss and refers to consolidated net income for an entity that does not have an NCI and income attributable to the parent for an entity with an NCI. “Income available to common stockholders,” which is defined in ASC 260-10-20, refers to income available or loss attributable to common stockholders for an entity that does not have an NCI and income available or loss attributable to common stockholders of the parent for an entity that has an NCI. While an entity with a discontinued operation may have one or more of income from continuing operations, loss from continuing operations, income from discontinued operations, loss from discontinued operations, net income, or net loss, references to “income” or “net income” in this chapter also encompass “loss” and “net loss,” respectively.

The discussion in Sections 4.2 through 4.8 is based on an entity’s calculation of diluted EPS during a discrete reporting period (i.e., a quarterly financial reporting period for an SEC registrant). Section 4.9 addresses special considerations related to calculating diluted EPS on a year-to-date basis.

This chapter does not discuss the application of the two-class method of calculating diluted EPS. For discussion of that method, see Chapter 5.

4.1.1 Methods of Calculating Diluted EPS

The table below lists the different types of contracts to which an entity generally applies the various methods of calculating diluted EPS.

Table 4-1

Type of Potential Common Share	Diluted EPS Method(s) Applicable	Section in This Chapter
Written call options (common stock)	Treasury stock	Section 4.2
Written put options (common stock)	Reverse treasury stock	Section 4.3
Nonvested shares (common stock)	Treasury stock	Section 4.2
Forward sale contracts (common stock)	Treasury stock	Section 4.2
Forward purchase contracts (common stock)	Reverse treasury stock	Section 4.3
Convertible debt	If-converted	Section 4.4
Convertible preferred stock	If-converted	Section 4.4
Written call options (convertible securities)	Treasury stock	Section 4.2
Forward sale contracts (convertible securities)	Treasury stock	Section 4.2
Contingently issuable shares	Contingently issuable share	Section 4.5

4.1.1.1 Purchased Options

ASC 260-10

Purchased Options

45-37 Contracts such as purchased put options and purchased call options (options held by the entity on its own stock) shall not be included in the computation of diluted EPS because including them would be antidilutive. That is, the put option would be exercised only when the exercise price is higher than the market price and the call option would be exercised only when the exercise price is lower than the market price; in both instances, the effect would be antidilutive under both the treasury stock method and the reverse treasury stock method, respectively.

Contracts that give an entity the right to either purchase or sell its common stock are never included in the calculation of diluted EPS because they would only be exercised by the entity when they are in-the-money and the resulting effect would be antidilutive under the treasury stock method or the reverse treasury stock method. Purchased options should not be included in the calculation of diluted EPS under the treasury stock method or reverse treasury stock method regardless of whether (1) the control number for calculating diluted EPS is income or a loss or (2) the purchased options are classified as an asset or within stockholders’ equity. If an entity has recognized a purchased option on its common stock as an asset at fair value, with changes in fair value recognized in earnings, the entity should not reverse the fair value adjustments recognized in earnings on the asset that have been included in the numerator in the calculation of diluted EPS.

Connecting the Dots

An entity may enter into a combination of purchased and written options on its common stock in an attempt to economically hedge share dilution. Such strategies commonly occur in conjunction with the issuance of convertible securities (e.g., capped call and other call spread transactions). ASC 260 does not allow an entity to offset the dilutive effect of outstanding written options with purchased options even if the options are with the same counterparty. Therefore, when an entity has entered into both purchased and written options on its common stock, the accounting for diluted EPS depends on the unit of account for such options. (For further discussion of the identification of units of account, see Section 3.3.1 of Deloitte’s Roadmap Distinguishing Liabilities From Equity.) If an entity concludes that the purchased option and written option components are separate freestanding financial instruments, the treasury stock or reverse treasury stock method, as applicable, must be applied to the written option, with no adjustments in the calculation of diluted EPS made for the purchased option. If, however, an entity concludes that a combination of purchased and written options constitutes a single unit of account, the entity should apply the treasury stock method or reverse stock method, as applicable, to the combined contract provided that it is dilutive to do so (i.e., the written option element is in-the-money from the perspective of the counterparty). In this situation, the effect of the purchased option component of the single combined freestanding financial instrument may partially offset the dilutive impact of the written option component of the single combined freestanding financial instrument. Regardless of the unit of account, the entity should also consider whether purchased or written option contracts, or combinations thereof, represent participating securities to which it must apply the two-class method of calculating diluted EPS.

4.1.2 Antidilution and Control Number

4.1.2.1 General

ASC 260-10

No Antidilution

45-17 The computation of diluted EPS shall not assume conversion, exercise, or contingent issuance of securities that would have an antidilutive effect on EPS. Shares issued on actual conversion, exercise, or satisfaction of certain conditions for which the underlying potential common shares were antidilutive shall be included in the computation as outstanding common shares from the date of conversion, exercise, or satisfaction of those conditions, respectively. In determining whether potential common shares are dilutive or antidilutive, each issue or series of issues of potential common shares shall be considered separately rather than in the aggregate.

45-18 Convertible securities may be dilutive on their own but antidilutive when included with other potential common shares in computing diluted EPS. To reflect maximum potential dilution, each issue or series of issues of potential common shares shall be considered in sequence from the most dilutive to the least dilutive. That is, dilutive potential common shares with the lowest earnings per incremental share shall be included in diluted EPS before those with a higher earnings per incremental share. Example 4 (see paragraph 260-10-55-57) illustrates that provision. Options and warrants generally will be included first because use of the treasury stock method does not affect the numerator of the computation. An entity that reports a discontinued operation in a period shall use income from continuing operations (adjusted for preferred dividends as described in paragraph 260-10-45-11) as the control number in determining whether those potential common shares are dilutive or antidilutive. That is, the same number of potential common shares used in computing the diluted per-share amount for income from continuing operations shall be used in computing all other reported diluted per-share amounts even if those amounts will be antidilutive to their respective basic per-share amounts. (See paragraph 260-10-45-3.) The control number excludes income from continuing operations attributable to the noncontrolling interest in a subsidiary in accordance with paragraph 260-10-45-11A. Example 14 (see paragraph 260-10-55-90) provides an illustration of this guidance.

45-19 Including potential common shares in the denominator of a diluted per-share computation for continuing operations always will result in an antidilutive per-share amount when an entity has a loss from continuing operations or a loss from continuing operations available to common stockholders (that is, after any preferred dividend deductions). Although including those potential common shares in the other diluted per-share computations may be dilutive to their comparable basic per-share amounts, no potential common shares shall be included in the computation of any diluted per-share amount when a loss from continuing operations exists, even if the entity reports net income.

45-20 The control number for determining whether including potential common shares in the diluted EPS computation would be antidilutive should be income from continuing operations (or a similar line item above net income if it appears on the income statement). As a result, if there is a loss from continuing operations, diluted EPS would be computed in the same manner as basic EPS is computed, even if an entity has net income after adjusting for a discontinued operation. Similarly, if an entity has income from continuing operations but its preferred dividend adjustment made in computing income available to common stockholders in accordance with paragraph 260-10-45-11 results in a loss from continuing operations available to common stockholders, diluted EPS would be computed in the same manner as basic EPS.

Only potential common shares that are dilutive (i.e., that reduce basic EPS) are included in the calculation of diluted EPS. ASC 260-10-45-17 through 45-20 illustrate two important concepts that an entity must consider in determining whether potential common shares are dilutive — the control number and antidilution sequencing. The application of these concepts in the calculation of diluted EPS for a discrete financial reporting period is discussed below. Section 4.9 discusses the application of these concepts to a year-to-date calculation of diluted EPS.

4.1.2.2 Control Number

The control number represents the single amount that an entity uses to determine whether each potential common share issuance or series of issuances is dilutive. The control number is applied, along with the antidilution sequencing requirements, to calculate diluted EPS (see Section 4.1.2.3 for discussion of antidilution sequencing). The control number simplifies the calculation of diluted EPS for an entity that presents a discontinued operation because the entity includes the same potential common shares in the calculation of diluted EPS for continuing operations, discontinued operations, and net income. When an entity reports a discontinued operation, it uses income from continuing operations as the control number and applies the antidilution sequencing requirements to potential common shares to determine whether they are included in diluted EPS from continuing operations. If so, the entity always includes those potential common shares in the amounts of diluted EPS calculated for discontinued operations and net income, even if such inclusion is antidilutive to those respective amounts of diluted EPS. The table below summarizes the control number that is used to determine whether potential common shares are included in the calculation of diluted EPS in accordance with the antidilution sequencing requirements of ASC 260.

Table 4-2

Income Statement Contains	Control Number	Reporting if Control Number Is a Loss1
No discontinued operations or NCIs	Income available to common stockholders2	The inclusion of potential common shares in diluted EPS will generally be antidilutive. Therefore, basic EPS and diluted EPS are generally the same.
Discontinued operations only	Income available to common stockholders from continuing operations3	The inclusion of potential common shares in diluted EPS related to continuing operations will generally be antidilutive. Therefore, basic EPS and diluted EPS are generally the same for continuing operations, discontinued operations, and net income even if an entity reports income from continuing operations, income from discontinued operations, or net income.
NCIs only	Income available to common stockholders of the parent4	The inclusion of potential common shares in diluted EPS will generally be antidilutive. Therefore, basic EPS and diluted EPS are generally the same.
Discontinued operations and NCIs	Income available to common stockholders of the parent from continuing operations5	The inclusion of potential common shares in diluted EPS from continuing operations will generally be antidilutive. Therefore, basic EPS and diluted EPS are generally the same for continuing operations, discontinued operations, and net income attributable to the parent even if the entity reports income from continuing operations, income from discontinued operations, or net income.

As discussed in the table above, when an entity reports a discontinued operation, income from continuing operations is the control number used to determine whether potential common shares are included in the calculation of diluted EPS in accordance with the antidilution sequencing requirements of ASC 260. As a result, if an entity reports a loss from continuing operations, all potential common shares will generally be excluded from the calculations of diluted EPS from continuing operations, discontinued operations, and net income regardless of whether there is income or loss from discontinued operations and net income. Conversely, if an entity reports income from continuing operations, all potential common shares that are dilutive to income from continuing operations in accordance with the antidilution sequencing requirements of ASC 260 will always be included in the calculations of diluted EPS from continuing operations, discontinued operations, and net income regardless of whether there is income or loss from discontinued operations and net income. Thus, potential common shares that are dilutive to discontinued operations will be excluded from diluted EPS from discontinued operations when those potential common shares are antidilutive to continuing operations. Similarly, potential common shares that are antidilutive to discontinued operations will be included in diluted EPS from discontinued operations when those potential common shares are dilutive to continuing operations. Because of this requirement, it is possible for diluted EPS to be a smaller loss per share than the loss per share for basic EPS for discontinued operations and net income when losses are reported for those items but income is reported from continuing operations.

Changing Lanes

Read in isolation, the guidance in ASC 260-10-45-19 and 45-20 could be interpreted as indicating that diluted EPS will equal basic EPS when an entity has a loss from continuing operations; however, the instrument-specific guidance in ASC 260-10-45-45 and 45-46 indicates that adjustments to the numerator are also required in certain situations (e.g., when changes in the fair value of a liability-classified instrument that may be settled in shares are recognized through earnings each period). This perceived inconsistency has caused diversity in practice. The FASB’s January 2025 proposed ASU on Codification improvements would clarify the contradiction between these two sections. If the proposed ASU is finalized, it would clarify that diluted EPS may not always equal basic EPS in periods of net loss from continuing operations. That is, an entity must calculate diluted EPS for a contract that may be settled in stock or cash that is reported as an asset or a liability for accounting purposes by determining the combined impact of this contract on the numerator and denominator under the appropriate method. See Section 4.7 for more information about the EPS impacts of contracts that may be settled in stock or cash. Before these proposed changes are finalized and become effective, either approach would generally be supportable provided that it is consistently applied. As of the date of this publication, the FASB is expected to release a final ASU related to this change in the fourth quarter of 2025.

Example 14 in ASC 260-10-55-90 and 55-91 illustrates how the control number concept can result in a diluted loss per share from discontinued operations and net income that is less than the corresponding amounts of basic loss per share.

ASC 260-10

Example 14: Antidilutive Securities

55-90 This Example illustrates the guidance in paragraph 260-10-45-18.

55-91 Assume that Entity A has income from continuing operations of $2,400, a loss from discontinued operations of $(3,600), a net loss of $(1,200), and 1,000 common shares and 200 potential common shares outstanding. Entity A’s basic per-share amounts would be $2.40 for continuing operations, $(3.60) for the discontinued operation, and $(1.20) for the net loss. Entity A would include the 200 potential common shares in the denominator of its diluted per-share computation for continuing operations because the resulting $2.00 per share is dilutive. (For illustrative purposes, assume no numerator impact of those 200 potential common shares.) Because income from continuing operations is the control number, Entity A also must include those 200 potential common shares in the denominator for the other per-share amounts, even though the resulting per-share amounts [$(3.00) per share for the loss from discontinued operation and $(1.00) per share for the net loss] are antidilutive to their comparable basic per-share amounts; that is, the loss per-share amounts are less.

4.1.2.3 Antidilution Sequencing

An entity is prohibited from applying antidilution (i.e., increasing basic EPS for the control number) in calculating diluted EPS. Accordingly, an entity must calculate diluted EPS in a manner that maximizes dilution (i.e., the amount of diluted EPS calculated is the lowest possible amount based on all potential combinations of the dilutive impact of potential common shares). To achieve this result, an entity must “sequence” each issuance or series of issuance of potential common shares that are individually dilutive in the order from most dilutive to least dilutive.6 Once these share issuances are sequenced, the entity includes the dilutive effect of each potential common share in the calculation of diluted EPS until the inclusion of the individually dilutive effect of a potential common share is antidilutive to the overall calculation of diluted EPS. When this occurs, that potential common share, as well as all other potential common shares that are less dilutive, is excluded from the calculation of diluted EPS.

Antidilution sequencing is applied only to the control number. Thus, as stated above, when an entity has a discontinued operation, the same potential common shares included in diluted EPS from continuing operations are included in the calculations of diluted EPS for discontinued operations and net income. Antidilution sequencing is required in the calculation of diluted EPS unless (1) the control number is a loss (i.e., all potential common shares would be antidilutive) or (2) the entity has only one issuance of potential common shares.

Connecting the Dots

When an entity has multiple issuances of the same potential common share, it generally must consider each issuance separately in applying antidilution sequencing. Issuances of multiple instruments may be aggregated and considered a single issuance for sequencing purposes during a financial reporting period only if all the following conditions are met:

The instruments are of the same type and have all the same terms (i.e., they are identical).
The instruments were outstanding for the same days during the financial reporting period (i.e., they either were outstanding for the entire period or issued or expired on the same day during the financial reporting period).

Aggregation of multiple instruments into a single issuance for antidilution sequencing purposes is only appropriate when each individual instrument has the same incremental dilutive effect. Since the average market price that is used under the treasury stock method is affected by the number of days a potential common share is outstanding during a financial reporting period, it would not be appropriate to aggregate instruments with the same terms that were not outstanding for the same number of days during a financial reporting period.

Example 4 in ASC 260-10-55-57 through 55-59 illustrates the concept of antidilution sequencing.

ASC 260-10

Example 4: Antidilution Sequencing

55-57 This Example illustrates the antidilution sequencing provisions described in paragraph 260-10-45-18 for Entity A for the year ended December 31, 20X0. This Example has the following assumptions:

Entity A had income available to common stockholders of $10,000,000 for the year 20X0.
2,000,000 shares of common stock were outstanding for the entire year 20X0.
The average market price of the common stock was $75.
Entity A had the following potential common shares outstanding during the year:
1. Options (not compensation-related) to buy 100,000 shares of common stock at $60 per share.
2. 800,000 shares of convertible preferred stock entitled to a cumulative dividend of $8 per share. Each preferred share is convertible into two shares of common stock.
3. 5 percent convertible debentures with a principal amount of $100,000,000 (issued at par). Each $1,000 debenture is convertible into 20 shares of common stock.
The tax rate was 40 percent for 20X0.

55-58 The following table illustrates calculation of earnings per incremental share.

55-59 The following table illustrates calculation of diluted EPS.

Note that because diluted EPS increases from $3.23 to $3.45 when convertible preferred shares are included in the computation, those convertible preferred shares are antidilutive and are ignored in the computation of diluted EPS. Therefore, diluted EPS is reported as $3.23.

Footnotes

The control number may be a loss when an entity reports net income because it includes the impact of dividends on preferred stock. See also Section 4.7.3.2.2 for discussion of current guidance and pending changes that clarify the approach that an entity is required to use when it has contracts that may be settled in stock or cash that is reported as an asset or a liability for accounting purposes.

Income available to common stockholders generally represents net income less preferred stock dividends. As discussed in Chapter 3, many types of transactions represent “deemed” preferred stock dividends that reduce net income in arriving at income available to common stockholders.

Income available to common stockholders from continuing operations generally represents income from continuing operations less preferred stock dividends allocated to continuing operations. As discussed in Chapter 3, many types of transactions can result in adjustments to net income in arriving at income available to common stockholders. When an entity presents a discontinued operation, adjustments to net income to arrive at income available to common stockholders must be allocated between continuing and discontinued operations to arrive at income available to common stockholders from continuing operations. Sections 8.6.3.2.1 and 8.7 further discuss the accounting and presentation of EPS for an entity that presents a discontinued operation.

Income available to common stockholders of the parent generally represents net income attributable to the parent less preferred stock dividends allocated to the parent. As discussed in Chapter 3, many types of transactions can result in adjustments to net income in arriving at income available to common stockholders. When an entity presents an NCI, adjustments to income attributable to the parent to arrive at income available to common stockholders of the parent are determined by including the parent’s portion of income available to common stockholders of the consolidated subsidiary in the parent’s calculation of income available to common stockholders. See Section 8.8 for further discussion of how EPS is calculated for an entity with an NCI.

Income available to common stockholders of the parent from continuing operations represents income attributable to the parent from continuing operations less preferred stock dividends. As discussed in Chapter 3, many types of transactions can result in adjustments to net income in arriving at income available to common stockholders. When an entity presents a discontinued operation and an NCI, the considerations discussed in notes 3 and 4 of this table are relevant. Example 8-19 illustrates the presentation of EPS for an entity that reports an NCI in a discontinued operation.

Any potential common share that is individually antidilutive is excluded from the antidilution sequencing process. For example, as discussed in Section 4.2.2.1, under the treasury stock method, options on common shares that are out-of-the-money are individually antidilutive and would never be included in diluted EPS regardless of the control number.

Confidential and Proprietary — for Use Solely by Authorized Personnel

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.