4.3 Reverse Treasury Stock Method

4.3.1 Scope

ASC 260-10

Written Put Options and the Reverse Treasury Stock Method

45-35 Contracts that require that the reporting entity repurchase its own stock, such as written put options and forward purchase contracts other than forward purchase contracts accounted for under paragraphs 480-10-30-3 through 30-5 and 480-10-35-3, shall be reflected in the computation of diluted EPS if the effect is dilutive. If those contracts are in the money during the reporting period (the exercise price is above the average market price for that period), the potential dilutive effect on EPS shall be computed using the reverse treasury stock method. . . .

The reverse treasury stock method applies to contracts that require an entity to repurchase its common stock. Such contracts include the following:13

Written put options (common stock) — Options written by an entity under which the counterparty has the right, but not the obligation, to sell a specified quantity or amount of common stock to the entity at a fixed or otherwise determinable price.
Forward purchase contracts (common stock) — Contracts that require the entity to purchase a specified quantity or amount of common stock from the counterparty at a future date at a fixed or otherwise determinable price.

An entity should not apply the reverse treasury stock method to a contract listed above in the following situations:

The contract represents a forward contract to repurchase common stock that is within the scope of ASC 480-10-30-3 through 30-5 and ASC 480-10-35-3 (see Section 4.8.4.1.1).
The contract must be net settled in cash (i.e., no common shares are purchased upon settlement).
The contract is a participating security and the two-class method of calculating diluted EPS is more dilutive than the reverse treasury stock method.

The discussion in Section 4.3.2 focuses on the application of the reverse treasury stock method to potential common shares within its scope that are not participating securities. If a potential common share is a participating security, an entity is required to apply the more dilutive of the reverse treasury stock method or the two-class method of calculating diluted EPS (see Section 5.5.4). Sections 4.3.2.2.3 and 4.6 discusses the application of the reverse treasury stock method to instruments that contain multiple settlement alternatives.

4.3.2 Application of the Reverse Treasury Stock Method

4.3.2.1 General

ASC 260-10

Conversion Rate or Exercise Price

45-21 Diluted EPS shall be based on the most advantageous conversion rate or exercise price from the standpoint of the security holder. Previously reported diluted EPS data shall not be retroactively adjusted for subsequent conversions or subsequent changes in the market price of the common stock.

Variable Denominator

45-21A Changes in an entity’s share price may affect the exercise price of a financial instrument or the number of shares that would be used to settle the financial instrument. For example, when the principal of a convertible debt instrument is required to be settled in cash but the conversion premium is required to (or may) be settled in shares, the number of shares to be included in the diluted EPS denominator is affected by the entity’s share price. In applying both the treasury stock method and the if-converted method of calculating diluted EPS, the average market price shall be used for purposes of calculating the denominator for diluted EPS when the number of shares that may be issued is variable, except for contingently issuable shares within the scope of the guidance in paragraphs 260-10-45-48 through 45-57. See paragraphs 260-10-55-4 through 55-5 for implementation guidance on determining an average market price.

Written Put Options and the Reverse Treasury Stock Method

Issuance of sufficient common shares shall be assumed at the beginning of the period (at the average market price during the period) to raise enough proceeds to satisfy the contract.
The proceeds from issuance shall be assumed to be used to satisfy the contract (that is, to buy back shares).
The incremental shares (the difference between the number of shares assumed issued and the number of shares received from satisfying the contract) shall be included in the denominator of the diluted EPS computation.

45-36 For example, an entity sells 100 put options with an exercise price of $25; the average market price for the period is $20. In computing diluted EPS at the end of the period, the entity assumes it issues 125 shares at $20 per share to satisfy its put obligation of $2,500. The difference between the 125 shares issued and the 100 shares received from satisfying the put option (25 incremental shares) would be added to the denominator of diluted EPS.

The reverse treasury stock method represents a method of determining the dilutive effect of a contract that obligates an entity to purchase its common shares. Under this method, it is assumed that the entity raises the proceeds necessary to satisfy its obligation under the share purchase contract by issuing its common shares to market participants at the average market price during the period. The excess of the common shares assumed issued over the common shares purchased under the contract represents the incremental common shares under the reverse treasury stock method. Contracts that are subject to the reverse treasury stock method must be classified as liabilities (or assets in some circumstances) in accordance with ASC 480 regardless of whether they provide for settlement in cash or shares. As a result, under the reverse treasury stock method, an entity is required to adjust the numerator in addition to including incremental common shares. See further discussion in Section 4.3.2.2.1.

Like the treasury stock method (as discussed in Section 4.2.2.1), the reverse treasury stock method is only applied to written put options that are in-the-money from the perspective of the counterparty. This determination is based on a comparison of the exercise price with the average market price of the entity’s common stock. The reverse treasury stock method should not be applied to an out-of-the-money written put option that would be dilutive to EPS because of the adjustment made to the numerator to reverse the mark-to-market amount recognized on the contract during the reporting period. However, because forward purchase contracts must be settled regardless of whether they are in-the-money or out-of-the-money, the reverse treasury stock method should be applied to forward contracts if such contracts are dilutive. An entity would determine whether a forward purchase contract is dilutive to EPS on the basis of the aggregate effect of the numerator adjustment and the incremental common shares to be included in the denominator under the reverse treasury stock method.

Connecting the Dots

A written put option that is in-the-money from the perspective of the counterparty may be antidilutive because of the adjustment to the numerator to reverse the mark-to-market amount recognized on the contract during the reporting period. ASC 260-10-45-17 precludes the inclusion of this antidilutive effect in the calculation of diluted EPS.

If a contract subject to the reverse treasury stock method is a participating security, the more dilutive of the reverse treasury stock method or the two-class method must be applied, as discussed in Section 5.5.4.

4.3.2.1.1 Adjustments to the Number of Shares Purchased Upon Settlement

The number of common shares to be purchased upon settlement of a written put option or forward purchase contract may vary because of (1) the passage of time; (2) the occurrence or nonoccurrence of a specified event; or (3) a specified rate, price, index, or other variable.

If the number of common shares purchased upon settlement varies only on the basis of the passage of time, the entity should apply the guidance in ASC 260-10-45-21, which requires that diluted EPS be calculated by using “the most advantageous conversion rate or exercise price from the standpoint of the security holder.” The entity must consider any settlement term that will be available to the counterparty at any point during the term of the contract and assume settlement upon terms that maximize value to the counterparty.

If the number of common shares purchased upon settlement is subject to adjustment on the basis of the occurrence or nonoccurrence of a specified event (other than changes in the fair value of the entity’s stock price) that is not within the counterparty’s control, the entity should apply the guidance on contingently issuable shares to determine the number of common shares to be purchased on settlement. As discussed in Section 4.5, the entity should assume that the current status of the condition as of the reporting date will remain unchanged (i.e., the specified event will not occur). As a result, potential adjustment features that are commonly included in the terms of instruments subject to the reverse treasury stock method will have no impact on the application of the reverse treasury stock method until such adjustment events occur. Table 4-3 lists common adjustment events that will have no impact on the application of the reverse treasury stock method before the occurrence of the related event.

If the number of common shares to be purchased upon settlement is linked to a specified rate, price, index, or other variable, the entity should determine the number of shares (see Table 4-5) by applying either (1) the guidance in ASC 260-10-45-21A on variable denominators or (2) the guidance in ASC 260-10-45-48 through 45-57 on contingently issuable shares. Under the variable denominator approach, the entity would determine the number of common shares that would be purchased upon settlement on the basis of the average of the specified rate, price, index, or other variable during the reporting period. As discussed in Section 4.5, under the contingently issuable share approach, the entity would reflect the number of common shares that would be purchased upon settlement on the basis of the current rate, price, index, or other variable at the end of the reporting period (or on the basis of the average rate, price, index, or other variable, assuming settlement occurred on the last day of the reporting period if the contract stipulates an average rate, price, index, or other variable). As discussed in Section 4.3.2.1.3, under either approach, the stock price used to calculate the number of common shares assumed to be issued to pay the purchase price of the written option or forward purchase contract must reflect the average market price during the entire financial reporting period (or portion thereof during the reporting period in which the contract was outstanding). Since contracts subject to the reverse treasury stock method are classified as assets or liabilities and typically recognized at fair value, with changes in fair value reported in earnings, an entity must also adjust the numerator in calculating diluted EPS under the reverse treasury stock method, as discussed in Section 4.3.2.2.1.

Table 4-5

Determining the Number of Shares to Be Purchased Upon Settlement When the Shares Vary on the Basis of a Specified Rate, Price, Index, or Other Variable
Type of Variable	Approach Used
Entity’s stock price	Average market price approach
Other rate, price, index, or variable	Average market price approach or contingently issuable share method

Although ASC 260-10-45-21A does not specifically refer to the reverse treasury stock method, an entity must use the average market price approach if the number of shares varies solely on the basis of the entity’s stock price. Arrangements subject to the reverse treasury stock method would not be expected to qualify for the contingently issuable share approach under ASC 260 because any arrangement in which an entity receives its own shares for little or no consideration would generally be antidilutive in the calculation of diluted EPS. However, an entity can choose to apply either the average market price approach or contingently issuable share method as an accounting policy if the variability is due to something other than just the entity’s stock price, since ASC 260-10-45-21A only specifically addresses how an entity accounts for diluted EPS when the variable is based on the entity’s stock price.

Connecting the Dots

As noted in the table above, the number of common shares assumed to be purchased may be determined on the basis of conditions at the end of the reporting period when the number of common shares assumed to be issued to pay the purchase price is based on the average market price over the entire financial reporting period. In such circumstances, a written put option or forward purchase contract on a number of common shares that varies on the basis of a rate, price, index, or market variable other than stock price may be dilutive, or in-the-money, for diluted EPS purposes even if the contract is out-of-the-money from the perspective of the counterparty on the basis of the market price of the entity’s common stock as of the end of the reporting period.

4.3.2.1.2 Proceeds

The determination of the proceeds used to apply the reverse treasury stock method is generally straightforward. The proceeds represent the amount the entity would need to raise to pay the purchase price to acquire common shares under the contract (i.e., the exercise price or forward price). However, as discussed below, an entity must take additional considerations into account in certain situations.

4.3.2.1.2.1 Adjustments to the Exercise Price or Forward Price

The exercise price or forward price of a written put option or forward purchase contract may vary because of (1) the passage of time; (2) the occurrence or nonoccurrence of a specified event; or (3) a specified rate, price, index, or other variable.

If the exercise price or forward price varies only on the basis of the passage of time, the entity should apply the guidance in ASC 260-10-45-21, which requires that diluted EPS be calculated by using “the most advantageous conversion rate or exercise price from the standpoint of the security holder.” The entity must consider any exercise price or forward price that will be available to the counterparty at any point during the term of the contract and assume settlement upon terms that maximize value to the counterparty.

If the exercise price or forward price is subject to adjustment on the basis of the occurrence or nonoccurrence of a specified event (other than changes in the fair value of the entity’s stock price) that is not within the counterparty’s control, the entity should apply the guidance on contingently issuable shares to determine the exercise price or forward price. As discussed in Section 4.5, the entity should assume that the current status of the condition on the reporting date will remain unchanged (i.e., the specified event will not occur). As a result, potential adjustment features that are commonly included in the terms of instruments subject to the reverse treasury stock method will have no impact on the application of the reverse treasury stock method until such adjustments occur. Table 4-3 lists common adjustment events that will have no impact on the application of the reverse treasury stock method before the occurrence of the related event.

If the exercise price or forward price varies solely on the basis of the entity’s stock price, the entity should apply ASC 260-10-45-21A, which requires that the entity determine the purchase price by using the average market price of the entity’s stock during the reporting period. If, however, the exercise price or forward price varies on the basis of a specified rate, price, index, or other variable (i.e., it is not based solely on the entity’s stock price), an entity may apply any of the following approaches since ASC 260 does not contain specific guidance on this matter:

View A: The purchase price reflects the exercise price or forward price as of the end of the reporting period — This view is consistent with the guidance on contingently issuable shares in ASC 260. Although that guidance only specifically addresses how to determine the number of common shares, it may be applied by analogy to determine the exercise price or forward price. Under that guidance, it is assumed that the contingency (in this case, the amount of the exercise price or forward price) is resolved as of the end of the reporting period. Thus, an entity calculates the exercise price or forward price on the basis of the current rate, price, index, or other variable as of the reporting date (or the average rate, price, index, or other variable, assuming settlement of the contract on the last day of the reporting period if the contract stipulates an averaging formula). See Section 4.5 for additional discussion of the contingently issuable share method.
View B: The purchase price reflects the highest exercise price or forward price during any day within the reporting period — This view is consistent with ASC 260-10-45-21, which requires that diluted EPS be calculated on the basis of “the most advantageous conversion rate or exercise price from the standpoint of the security holder.” As of each reporting date, the entity should evaluate all the exercise or forward prices applicable for the entire time during the reporting period in which the contract was outstanding and should use the price that is least advantageous to the entity and produces the highest purchase price. The entity should not project future exercise or forward prices since they will vary on the basis of changes in the rate, price, index, or other variable.
View C: The purchase price reflects the average exercise price or forward price during the reporting period — This view is consistent with ASC 260-10-45-21A and ASC 260-10-45-35, which require the use of an average.

These three approaches are acceptable regardless of whether the entity or counterparty controls the timing of the settlement date (since neither party ultimately controls the rate, price, index, or other variable that affects the purchase price). The approach selected is considered an accounting policy election that must be applied consistently and disclosed.

Under the reverse treasury stock method, the purchase price payable by the entity to settle a written put option or forward repurchase contract is used to determine the number of common shares that the entity would be assumed to issue to pay the purchase price. Under any of the three approaches described above that are used to determine the purchase price, the entity must assume that it issues common shares to pay the purchase price at the average market price during the reporting period (see Section 4.3.2.1.3). In addition, since contracts subject to the reverse treasury stock method are classified as assets or liabilities and typically recognized at fair value, with changes in fair value reported in earnings, the calculation of diluted EPS should include an adjustment to the numerator, as discussed in Section 4.3.2.2.1.

It is not acceptable to determine the proceeds on the basis of the exercise price or forward price at the beginning of the reporting period because there is no basis in ASC 260 for the use of this approach.

Connecting the Dots

When the exercise price or forward price of a written put option or forward purchase contract subject to the reverse treasury stock method is automatically adjusted solely on the basis of prespecified adjustments designed to represent the amount of dividends the entity is expected to declare on typical dividend declaration dates, the highest exercise price or forward price that may apply during the remaining term of the contract on the basis of only the passage of time (which will generally be the exercise price or forward price as of the reporting date) must be used in applying the reverse treasury stock method. This requirement results from the guidance in ASC 260-10-45-21, which applies to adjustments to the exercise price or forward price that are made on the basis of the mere passage of time. This requirement is applicable regardless of whether the entity or counterparty controls the ability to settle the contract before its stated maturity. Because the average market price used to determine the number of common shares that would need to be issued to pay the purchase price will not yet reflect these future dividends, this approach will often exacerbate the dilution under the reverse treasury stock method. If the contract can only be exercised or settled before its stated maturity date upon the occurrence of a contingent event that is not within the control of the counterparty, the guidance on adjustments to the exercise price or forward price on the basis of the occurrence or nonoccurrence of a specified event that is not within the counterparty’s control is applicable (i.e., the guidance on contingently issuable shares in ASC 260-10-45-54).

If adjustments to the exercise price or forward price of a written put option or forward purchase contract subject to the reverse treasury stock method occur only when and if the entity declares a dividend on its common stock, the purchase price used to apply the reverse treasury stock method should not reflect the impact of future dividends before their declaration. This is because the entity is under no obligation to pay any cash dividends on its common stock and, in the absence of the declaration of a cash dividend, the exercise price or forward price will not change upon the mere passage of time.

4.3.2.1.2.2 Prepaid Contracts

A prepaid forward purchase contract is not subject to the reverse treasury stock method because its application would always be antidilutive. A prepaid written put option for which the prepayment is not refundable (i.e., the issuing entity pays the exercise price net of any option premium and is not entitled to a return of the prepaid amount if the option is not exercised) is the economic equivalent of a prepaid forward purchase contract in the calculation of diluted EPS. Therefore, this contract is also not subject to the reverse treasury stock method because it would be antidilutive.

In the case of a prepaid written put option for which the issuing entity pays the exercise price net of any option premium up front and is entitled to receive a return of the exercise price, the accounting for diluted EPS will depend on the specific terms of the arrangement. If the issuing entity has the option of receiving its prepayment back before the expiration of the written put option, the prepayment should be ignored and the reverse treasury stock method should be applied in the same manner as it would if the written put option was not prepaid. If, however, the prepayment is returned only if the contract expires unexercised, there is no incremental dilutive effect of the contract, because the issuing entity will either (1) receive its prepayment back and no shares will be purchased because the contract expires unexercised or (2) will not receive back the prepayment but will receive shares of its own stock. In the first situation, no shares are repurchased and, accordingly, there is no incremental dilutive impact. In the second situation, it would be antidilutive to reflect the shares acquired.

4.3.2.1.3 Average Market Price

The same concepts discussed in Section 4.2.2.1.3 regarding the determination of the average market price under the treasury stock method apply under the reverse treasury stock method. Under the reverse treasury stock method, the average market price of the entity’s common stock is used to determine the number of common shares that are assumed to be issued to pay the exercise price or forward price of the contract.

4.3.2.1.3.1 Contracts That Are Issued, Exercised, Forfeited, or Canceled, or That Expire, During a Financial Reporting Period

ASC 260-10-45-26 states, in part, that “[d]ilutive options or warrants that are issued during a period or that expire or are cancelled during a period shall be included in the denominator of diluted EPS for the period that they were outstanding [and] dilutive options or warrants exercised during the period shall be included in the denominator for the period prior to actual exercise.” To meet the ASC 260 requirement under which diluted EPS must include incremental common shares weighted for the period in which a written put option or forward purchase contract was outstanding during a financial reporting period, the average market price used to apply the reverse treasury stock method should reflect an average over the period in which the instrument was outstanding rather than an average over the entire financial reporting period. Thus, for contracts that are issued, exercised, forfeited, or canceled, or that expired, during a financial reporting period, an entity will need to calculate, on an instrument-by-instrument basis, the average market price for the portion of the period in which the instrument was outstanding. The average market price for the entire financial reporting period should not be used to determine the number of common shares that would need to be issued to pay the exercise price or forward price of a contract subject to the reverse treasury stock method if the contract was not outstanding for the entire financial reporting period. The average market price over the entire financial reporting period is used only for instruments that were outstanding for the entire reporting period. See further discussion in Section 4.2.2.1.3.1.

4.3.2.2 Method of Settlement

4.3.2.2.1 General

With one exception, ASC 480 requires an entity to classify written put options and forward purchase contracts as liabilities (or assets in some circumstances) and to initially and subsequently measure such contracts at fair value, with changes in fair value recognized in earnings.14 For written put options and forward purchase contracts, an entity should first determine whether the reverse treasury stock method should be applied to calculate diluted EPS. The reverse treasury stock method should not be applied to contracts that meet any of the following conditions:

The contract is a forward purchase contract that is subject to ASC 480-10-30-3 through 30-5 and ASC 480-10-35-3.
The contract must be cash-settled (i.e., no common shares are purchased on settlement).
The contract is a participating security and the two-class method of calculating diluted EPS is more dilutive than the reverse treasury stock method.

ASC 480-10-45-4 addresses the EPS accounting for a forward contract within the scope of ASC 480-10-30-3 through 30-5 and ASC 480-10-35-3 (see Section 4.8.4.1.1). If cash settlement of the contract is required, the reverse treasury stock method is not applied and no adjustments are made to the numerator or denominator in the calculation of diluted EPS. Any dilutive impact of the contract is only reflected through the mark-to-market adjustment recognized in earnings on the contract through the application of other GAAP.

The reverse treasury stock method is applied in all other circumstances if its application is dilutive. Other circumstances include (1) the contract must be share-settled or (2) the issuing entity or the counterparty is permitted to elect settlement in cash or shares.

Although contracts subject to the reverse treasury stock method must be classified as liabilities (or assets in some circumstances) for accounting purposes, it is still assumed that the contract is classified as an equity instrument under this method of calculating diluted EPS. Therefore, in addition to the incremental shares that are added to the denominator under the reverse treasury stock method, an adjustment to the numerator is also required. The numerator adjustment should reflect the change in net income that would have occurred during the reporting period if the contract had been classified in equity. Since contracts subject to the reverse treasury stock method are typically subsequently measured at fair value, with changes in fair value recognized in earnings, and contracts classified as equity instruments are typically not subsequently remeasured, the adjustment to the numerator will reflect a reversal of the mark-to-market adjustment recognized on the contract during the reporting period, net of any associated income tax effects. However, the numerator adjustment should not be made, and the incremental shares should not be added to the denominator, if either (1) the contract is a written put option and is out-of-the-money on the basis of a comparison of the exercise price with the average market price or (2) the aggregate effect of the two adjustments is antidilutive on the basis of the antidilution sequencing requirements in ASC 260. See Section 4.7 for further discussion of the accounting for diluted EPS for contracts subject to the reverse treasury stock method.

4.3.2.2.2 Contracts That Provide for Net-Share Settlement

Under the reverse treasury stock method, it is assumed that contracts are settled physically or on a “gross” basis (i.e., the entity pays the exercise price or forward price to the counterparty and receives the gross number of common shares underlying the contract). Contracts subject to the reverse treasury stock method often provide for net share or “cashless” settlement. Under a cashless settlement, the entity delivers to the counterparty a number of common shares with a current fair value (or a fair value determined on the basis of an average stock price) equal to the intrinsic value of the contract.

Economically, a net-share settlement of a contract to purchase shares is equivalent to a physical settlement accompanied by an issuance of shares to pay the exercise or forward price. However, an entity applying the reverse treasury stock method must assume that common shares are issued at the average market price during the financial reporting period; on the other hand, in a net-share settlement, the number of shares “issued” is based on the fair value of shares on the settlement date or a weighted-average price over a specified period that differs from the average market price over the reporting period. Given the concept of an average market price that must be applied under ASC 260, contracts that allow for net-share settlement should be assumed to be exercised on a gross basis, with the dilution calculated under the reverse treasury stock method.

4.3.2.2.3 Contracts With Multiple Settlement Alternatives

Certain contracts subject to the reverse treasury stock method may offer the counterparty alternatives related to the consideration that the entity transfers to it in return for the common shares delivered to the entity. For example, a counterparty to a put option may be permitted to require the entity to pay the exercise price in cash or by delivering a debt instrument of the entity. ASC 260-10-55-8 through 55-11 address the implications related to the calculation of diluted EPS for contracts with multiple settlement alternatives. ASC 260-10-55-8 states, in part, that “[w]hen several conversion alternatives exist, the computation shall give effect to the alternative that is most advantageous to the holder of the convertible security.” For contracts that offer the counterparty such alternatives related to the receipt of the exercise or forward price, the guidance in ASC 260-10-55-8 through 55-11 must be applied to reflect the potential dilutive impact on diluted EPS. See further discussion in Section 4.6 and Example 4-29.

For certain written put options and forward purchase contracts, the entity may have the right to choose among multiple settlement alternatives, which affect the form of consideration transferred to the counterparty in return for the common shares the entity receives from the counterparty. Since ASC 260-10-55-8 through 55-11 only address settlement alternatives at the option of the counterparty, an entity is not required to apply that guidance when it may elect the settlement alternative. For contracts that give the entity an option regarding the form of consideration it transfers to the counterparty in return for common shares delivered by the counterparty, it is presumed that the entity will act in its best interests since it controls the election. An entity generally would also use this assumption in determining the fair value of the contract and, as discussed in Section 4.3.2.2.1, contracts subject to the reverse treasury stock method are typically measured at fair value.

4.3.3 Examples

Example 4-9

Application of Reverse Treasury Stock Method to Written Put Options — No Mark-to-Market Adjustment in Period

On January 1, 20X1, Company A issues $100 million of debt securities with detachable put options on its common stock. Purchasers of each $1,000 note receive 10 put options, giving them the right to require A to purchase one share of its common stock for $25 per share, the market price of the common stock on the date the put options are issued. The put options are exercisable at any time during a three-year period beginning on the issuance date. The average price of A’s common stock during the reporting period ended December 31, 20X2, is $20 per share. For simplicity, assume that there is no mark-to-market adjustment on the written put options during the reporting period ended December 31, 20X2.

The incremental shares of common stock that A includes in diluted EPS during the reporting period are calculated as follows:

Example 4-10

Application of Reverse Treasury Stock Method to Written Put Options — Mark-to-Market Adjustment in Period

Assume the same facts as in the example above, except that during the reporting period ended December 31, 20X2, the fair value of the liability for the put options increases from $5 million to $6.5 million, resulting in a $1.5 million loss that Entity A recognizes as a mark-to-market adjustment reducing net income. Assume that A’s tax rate is 25 percent.

On the basis of these facts, in calculating the diluted impact of the put options under the reverse treasury stock method, A would need to make an adjustment to increase the numerator (i.e., income available to common stockholders) by $1,125,000 ($1,500,000 × 75%). This adjustment is required because no loss would have been recognized on the put options if they had been classified in equity. Thus, the entity would consider the $1,125,000 addition to the numerator and the 250,000 addition to the denominator in determining whether the put options were dilutive during the period in accordance with the antidilution sequencing requirements of ASC 260.

Footnotes

The reverse treasury stock method does not apply to purchased options because they are always antidilutive (see Section 4.1.1.1).

Forward purchase contracts that must be physically settled by repurchase of a fixed number of the issuer’s common shares are subject to the subsequent-measurement and EPS guidance in ASC 480 (see Section 4.8.4.1.1).

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.