4.9 YeartoDate Calculations of Diluted EPS
4.9.1 Treasury Stock Method
ASC 26010
Applying the Treasury Stock
Method
YeartoDate Computations
553 The number of incremental
shares included in quarterly diluted EPS shall be
computed using the average market prices during the
three months included in the reporting period. For
yeartodate diluted EPS, the number of incremental
shares to be included in the denominator shall be
determined by computing a yeartodate weighted average
of the number of incremental shares included in each
quarterly diluted EPS computation. Example 1 (see
paragraph 260105538) provides an illustration of that
provision.
553A Computation of
yeartodate diluted EPS when an entity has a
yeartodate loss from continuing operations including
one or more quarters with income from continuing
operations and when inthemoney options or warrants
were not included in one or more quarterly diluted EPS
computations because there was a loss from continuing
operations in those quarters is as follows. In computing
yeartodate diluted EPS, yeartodate income (or loss)
from continuing operations shall be the basis for
determining whether or not dilutive potential common
shares not included in one or more quarterly
computations of diluted EPS shall be included in the
yeartodate computation.
553B Therefore:
 When there is a yeartodate loss, potential common shares should never be included in the computation of diluted EPS, because to do so would be antidilutive.
 When there is yeartodate income, if inthemoney options or warrants were excluded from one or more quarterly diluted EPS computations because the effect was antidilutive (there was a loss from continuing operations in those periods), then those options or warrants should be included in the diluted EPS denominator (on a weightedaverage basis) in the yeartodate computation as long as the effect is not antidilutive. Similarly, contingent shares that were excluded from a quarterly computation solely because there was a loss from continuing operations should be included in the yeartodate computation unless the effect is antidilutive.
Example 12 (see paragraph 260105585) illustrates this guidance.
As discussed in ASC 26010553 through 553B, the control number for
calculating yeartodate diluted EPS and applying the antidilution sequencing
requirements of ASC 260 is yeartodate net income.23 The number of incremental common shares included in the denominator under
the treasury stock method, when dilutive, must be based on a yeartodate
average of the number of incremental common shares calculated during each
quarterly financial reporting period. While incremental common shares may not
have been included in diluted EPS during a quarterly financial reporting period
because the control number for the period was a loss, to calculate yeartodate
diluted EPS in accordance with ASC 26010553 through 553B, an entity is
nevertheless required to calculate the number of incremental common shares under
the treasury stock method that would have been included in each quarterly
calculation of diluted EPS if the effect had been dilutive. In doing so, as
discussed in Section
4.2.2.1, the entity does not include outofthemoney options and
warrants in quarterly diluted EPS. Thus, if options or warrants are
outofthemoney in a quarterly financial reporting period, zero incremental
common shares will be included for that quarter in the yeartodate average.
However, for options or warrants that were inthemoney in a quarterly financial
reporting period but not included in diluted EPS because doing so would have
been antidilutive on the basis of the antidilution sequencing requirements of
ASC 260, such options or warrants may need to be included in yeartodate
diluted EPS since the antidilution sequencing requirements in a yeartodate
calculation of diluted EPS must be based on the yeartodate reported net
income.
Connecting the Dots
It may be intuitive to think that the incremental common shares included in yeartodate diluted
EPS should be calculated as if the yeartodate period was a discrete period. However, that
approach is not allowed for contracts subject to the treasury stock method. Using a yeartodate
approach to calculate the incremental common shares included in yeartodate diluted EPS may
be materially inconsistent with the requirements of ASC 26010553 through 553B. Consider
the following two examples:
 An entity calculating diluted EPS for an annual period that reports net income has 10 million options to sell common shares at $25 per share. The options are classified as equity instruments and must be sharesettled. The average market prices of the entity’s common stock for the quarterly reporting periods in the annual period are $24.00, $24.50, $25.00, and $40.00 per share. The average market price of the entity’s common stock for the year is $28.38 per share. Under the approach required in ASC 26010553 through 553B, the incremental common shares added to the denominator would be 937,500, representing the average of the incremental shares for the fourth quarter and zero incremental shares for the first three quarters because the options are not inthemoney. However, when the yeartodate average market price is used, the incremental shares added to the denominator would be 1,190,980.
 An entity calculating diluted EPS for an annual period with reported net income has 10 million options to sell common shares at $25 per share. The options are classified as equity instruments and must be sharesettled. The average market prices of the entity’s common stock for the quarterly reporting periods in the annual period are $26.00, $26.50, $27.00, and $20.00 per share. The average market price of the entity’s common stock for the year is $24.88 per share. Under the approach required in ASC 26010553 through 553B, the incremental common shares added to the denominator would be 422,849, representing the average of the incremental shares for each of the first three quarters and zero incremental shares for the fourth quarter because the options are not inthemoney. However, when the yeartodate average market price is used, the incremental shares added to the denominator would be zero because the options are not inthemoney.
If an instrument subject to the treasury stock method is a participating security, the more dilutive of the
treasury stock method or the twoclass method of calculating diluted EPS must be applied, as discussed
in Section 5.5.4. See Section 4.9.5 for information about situations in which the settlement method
assumed for diluted EPS purposes differs from the accounting classification of a contract subject to the
treasury stock method.
4.9.1.1 Example
ASC 26010
Example 12: Computing YeartoDate WeightedAverage Shares Outstanding
5585 The following Cases illustrate the guidance in paragraphs 26010553A through 553B for the quarterly
and annual computations of basic and diluted EPS for a company with options outstanding (equal to 20,000
incremental shares) that were in the money for the entire year (for simplicity purposes, this Example assumes
that the stock price never changed). Case A addresses yeartodate loss, and Case B addresses yeartodate
income. Note that in Case A, due to a loss for the period, zero incremental shares are included because the
effect would be antidilutive. Note that in Case B, zero shares included due to loss in the period.
Case A: YeartoDate Loss
5586 The following tables illustrate the computation of quarterly and yeartodate EPS.
Case B: YeartoDate Income
5587 The following tables illustrate the computation of quarterly and yeartodate EPS.
Note that if the options had been out of the money in any quarter, zero incremental shares would have been
included for that quarter in the yeartodate averaging.
4.9.2 Reverse Treasury Stock Method
The same yeartodate approach required for the treasury stock method would
apply under the reverse treasury stock method. However, because written put
options and forward purchase contracts are classified as liabilities (or assets
in some circumstances) and generally recognized at fair value, with changes in
fair value recognized in earnings (see Section 4.3.2.1), when the reverse
treasury stock method is applied for diluted EPS purposes, these instruments are
also subject to the yeartodate guidance on diluted EPS related to contracts
that have an assumed settlement method for diluted EPS that differs from the
classification for accounting purposes. See further discussion in Section 4.9.5.
4.9.3 IfConverted Method
As with the guidance applicable to the treasury stock method, the control number
for yeartodate diluted EPS is net income for the yeartodate period and the
antidilution sequencing requirements are applied on the basis of yeartodate
net income. The guidance on the weighting of incremental shares provided for
contracts subject to the treasury stock method is generally not relevant for
convertible securities subject to the ifconverted method. See Example 432 and
Connecting the Dots below for more
information.
Connecting the Dots
If the control number for the yeartodate period is a loss, the ifconverted method should
not be applied because its effect would be antidilutive. If the control number for the yeartodate
period is income, an entity should apply the ifconverted method, assuming conversion
at the beginning of the period or the date of issuance of the convertible security, if later, if the
application of this method is dilutive to the yeartodate calculation of diluted EPS on the basis of
the antidilution sequencing requirements of ASC 260 as they apply on a yeartodate basis. This
is the case even if the ifconverted method was not applied in one or more quarterly financial
reporting periods because there was a net loss during the period or the convertible security was
antidilutive for the period on the basis of the antidilution sequencing requirements in ASC 260.
Questions arise regarding how to calculate diluted EPS under the ifconverted
method for convertible securities that are contingently convertible on the basis
of (1) only a substantive nonmarketbased contingency or (2) a market price
trigger and some other substantive nonmarketbased
contingency. As discussed in Section 4.4.3, for each quarterly financial reporting period,
the ifconverted method should be applied only if the nonmarketbased
contingency has been met as of the end of the reporting period. If the
nonmarketbased contingency is met as of the reporting date and application of
the ifconverted method is dilutive, the effect should be included in diluted
EPS from the beginning of the quarterly reporting period or the date of
issuance, if later. This is consistent with the approach to diluted EPS for
contingently issuable shares. While ASC 260 does not specifically address how to
calculate yeartodate EPS under the ifconverted method when the
nonmarketbased contingency is met for only some of the quarterly periods
within a yeartodate period, the approach applied to contingently issuable
shares should be used to calculate diluted EPS on a yeartodate basis. Thus, if
the control number is income and the effect of conversion is dilutive on the
basis of the antidilution sequencing requirements of ASC 260, the common shares
included in the denominator would be weighted for the interim periods that were
included in the calculation of diluted EPS. The numerator adjustments under ASC
260104540 would be made only for the interim periods for which the common
shares issuable upon conversion were included. See Example 433 for more information.
If a convertible security subject to the ifconverted method is a participating
security, the more dilutive of the ifconverted method or the twoclass method
of calculating diluted EPS must be applied, as discussed in Section 5.5.4. See
Section 4.9.5
for further discussion of situations in which the settlement method assumed for
diluted EPS purposes differs from the accounting classification of the
convertible security subject to the ifconverted method.
Connecting the Dots
Under ASC 260104540, an entity must perform a
treasurystocktype calculation for convertible debt instruments subject
to the ifconverted method that require the issuer to pay the principal
amount in cash upon conversion (i.e., an Instrument C convertible debt
instrument). In particular, an entity would determine the effect on
diluted EPS by calculating the number of common shares that would be
issuable to settle the excess conversion value. The entity would perform
this calculation on the basis of its average stock price during the
period.
ASC 260105584 through 5584B appear to indicate that
for calculations of yeartodate diluted EPS, an entity should use its
average share price for the year. However, this approach would be
inconsistent with the statement in the example that “[t]he conversion
premium should be included in diluted earnings per share based on the
provisions of paragraphs 260104545 through 4546 and 260105532
through 5536A.” These paragraphs require an entity to apply ASC
26010553, which states that in the calculation of yeartodate
diluted EPS, “the number of incremental shares to be included in the
denominator shall be determined by computing a yeartodate weighted
average of the number of incremental shares included in each quarterly
diluted EPS computation.” Therefore, although ASC 260105584 through
5584B appear to indicate that the average share price for the year
should be used in the calculation of diluted EPS, an entity should
determine yeartodate diluted EPS for a convertible debt instrument
that requires the issuer to pay the principal amount in cash by
calculating a yeartodate average of the number of incremental shares
included in each calculation of quarterly diluted EPS. Such an approach
is consistent with the treasury stock method.
4.9.3.1 Examples
Example 432
Application of IfConverted Method to Quarterly and Annual Diluted EPS When There Are Periods of
Income and Loss
Company G reports the amounts below during its quarterly financial reporting periods for the year ended
December 31, 20X9; G does not report a discontinued operation during the year ended December 31, 20X9.
Assume that G has $5 million of 7.5 percent nonparticipating noncontingently convertible debt securities
outstanding for the entire year. The conversion price of the convertible securities is $25.00; therefore, the
debt securities are convertible into 200,000 common shares. The convertible securities must be settled in G’s
common shares and are accounted for at amortized cost. Company G has a tax rate of 25 percent.
Diluted EPS for each quarter in the year ended December 31, 20X9, would be calculated as follows:
Diluted EPS for the year ended December 31, 20X9, would be calculated as follows:
Note that because G reports a net loss during the third quarter, the annual diluted EPS amount of $1.83 does
not equal the sum of the quarterly diluted EPS amounts reported of $1.44 ($0.81 + $0.46 + $(1.00) + $1.17 =
$1.44). Further, if G had reported a net loss of $2,000,000 or $4.00 loss per basic share for the third quarter,
it would have reported a net loss of $500,000 for the year. Therefore, while the amounts of diluted EPS for the
first, second, and fourth quarters above would be unchanged, the diluted EPS for the year ended December 31,
20X9, would have been a $1.00 loss per share, which would have been the same amount reported as basic loss
per share.
Example 433
Application of IfConverted Method to Quarterly and Annual Diluted EPS for Contingently
Convertible Debt
Company H reported the amounts below during its quarterly financial reporting periods for the year ended
December 31, 20X4; H did not report a discontinued operation during the year ended December 31, 20X4.
Assume that H has $5 million of 7.5 percent nonparticipating contingently
convertible debt securities outstanding for the
entire year. The conversion price of the convertible
securities is $25.00; therefore, the debt securities
are convertible into 200,000 common shares. The
convertible securities must be settled in G’s common
shares and are accounted for at amortized cost. The
convertible securities are only convertible if the
following two conditions are met:

The market price of H’s common stock is $41.00 or more.

The occupancy rate of H’s commercial rental properties is 90 percent or more.
Company G has a tax rate of 25 percent.
Assume the following conditions at the end of each quarter in the year ended December 31, 20X4:
In accordance with ASC 260104544, an entity should include the convertible securities in diluted EPS,
assuming dilution, only in periods in which the nonmarketbased contingency is met. Therefore, the
ifconverted method applies for the first, second, and fourth quarters of 20X4. The fact that the market price
trigger is not met in the second quarter does not preclude the application of the ifconverted method for the
second quarter since market price triggers are disregarded in the determination of whether the ifconverted
method applies to contingently convertible debt instruments.
Diluted EPS for each quarter in the year ended December 31, 20X4, would be calculated as follows:
Diluted EPS for the year ended December 31, 20X4, would be calculated as follows:
4.9.4 Contingently Issuable Share Method
ASC 26010
Contingently Issuable Shares
4549 For yeartodate computations, contingent shares shall be included on a weightedaverage basis. That is,
contingent shares shall be weighted for the interim periods in which they were included in the computation of
diluted EPS.
The approach to yeartodate diluted EPS that is applied to contingently
issuable shares or contingently issuable potential common shares is consistent
with that applied to potential common shares subject to the treasury stock
method. The incremental shares included in the denominator in the calculation of
diluted EPS, if they are dilutive to the calculation of yeartodate diluted EPS
on the basis of the antidilution sequencing requirements of ASC 260, are based
on a weighted average of the common shares included in each quarterly
calculation of diluted EPS. If the control number for the yeartodate period is
a loss, no incremental common shares are included in the denominator for the
yeartodate period even if incremental common shares were included in one or
more quarterly financial reporting periods because of net income for those
quarterly periods. Similarly, if the control number for the yeartodate period
is income, incremental common shares that were excluded from the denominator for
quarterly periods because of quarterly losses are included in the calculation of
yeartodate diluted EPS if the approach is dilutive on the basis of the
antidilution sequencing requirements in ASC 260. As noted in Section 4.9.1, the
antidilution sequencing requirements are applied to a calculation of
yeartodate diluted EPS on the basis of yeartodate net income.
If a contingently issuable share arrangement is a participating security, the more dilutive of the
contingently issuable share method or the twoclass method of calculating diluted EPS must be applied,
as discussed in Section 5.5.4. If the settlement method assumed for diluted EPS purposes differs from
the accounting classification of a contract subject to the treasury stock method, see Section 4.9.5.
4.9.4.1 Examples
ASC 260105553 through 5556 provide an example illustrating the calculation of quarterly and yeartodate
diluted EPS for an entity that has contingently issuable common shares based on net income and a
nonfinancial performance measure. The example highlights the following requirements of ASC 260:
 The number of common shares included in the denominator of quarterly diluted EPS is equal to the number of common shares that would be issued if the end of the reporting period was the end of the contingency period.
 Common shares may be included in one quarterly reporting period but not in subsequent quarterly reporting periods; as a result, there may be volatility in the amounts of quarterly diluted EPS.
 The calculation of yeartodate diluted EPS is based on the weightedaverage common shares that have been assumed to be issuable in each quarterly financial reporting period.
ASC 26010
Example 3: Contingently Issuable Shares
5553 This Example
illustrates the contingent share provisions
described in paragraphs 260104513 and
260104548 through 4557. This Example has the
following assumptions:

Entity A had 100,000 shares of common stock outstanding during the entire year ended December 31, 20X1. It had no options, warrants, or convertible securities outstanding during the period.

Terms of a contingent stock agreement related to a recent business combination provided the following to certain shareholders of Entity A:

1,000 additional common shares for each new retail site opened during 20X1

5 additional common shares for each $100 of consolidated, aftertax net income in excess of $500,000 for the year ended December 31, 20X1.


Entity A opened two new retail sites during the year:

One on May 1, 20X1

One on September 1, 20X1.


Entity A’s consolidated, yeartodate aftertax net income was:

$400,000 as of March 31, 20X1

$600,000 as of June 30, 20X1

$450,000 as of September 30, 20X1

$700,000 as of December 31, 20X1.

5554 Note that in computing
diluted EPS for an interim period, contingent shares
are included as of the beginning of the period. For
yeartodate computations, paragraph 260104549
requires that contingent shares be included on a
weightedaverage basis.
5555 The following table illustrates the quarterly and annual calculation of basic and diluted EPS.
Example 434
Calculating Diluted EPS When Issuance of Shares Is Contingent on Amount of Future Earnings (Single
Earnings Target)
For the scenario discussed in Example 415, incremental common shares should be included in yeartodate
diluted EPS on a weightedaverage basis. If it is assumed that X had 200,000 weightedaverage common
shares outstanding and no other potential common shares and that the contingently issuable shares were not
classified as an asset or liability for accounting purposes, the calculation of X’s basic and diluted EPS for the
annual period would be as follows:
The weightedaverage number of shares added for diluted EPS is calculated as follows:
4.9.5 Contracts That May Be Settled in Cash or Stock
ASC 26010
Contracts That
May Be Settled in Stock or Cash
5534 Yeartodate diluted
EPS calculations may require an adjustment to the
numerator in certain circumstances. For example, for
contracts that are share settled for EPS purposes, the
numerator adjustment is equal to the earnings effect of
the change in the fair value of the asset or liability
recorded pursuant to Section 8154035 during the
yeartodate period. In that example, the number of
incremental shares included in the denominator should be
determined in accordance with the guidance in paragraph
26010553.
As discussed in Section 4.7.3, a numerator adjustment is
required when a contract is classified (in whole or in part) as an asset or
liability for accounting purposes but the potential common shares are included
in the denominator of the calculation of diluted EPS. ASC 260105534 requires
that, in such situations, the numerator adjustment be calculated on the basis of
the income statement for the yeartodate period. However, the number of shares
included in the denominator must be calculated in accordance with ASC
26010553 (e.g., under the treasury stock, reverse treasury stock, and
contingently issuable share methods, the incremental common shares are included
on a yeartodate basis by using an average of the incremental common shares
calculated on a discrete quarterly basis). In other words, a yeartodate
approach is used to determine the numerator adjustment and an averaging approach
is used to determine the denominator adjustment, if these adjustments are
dilutive on the basis of the antidilution sequencing requirements of ASC 260.
See Section 4.9.3
for further discussion of the accounting for yeartodate diluted EPS under the
ifconverted method.
Connecting the Dots
It is possible that an entity would reverse the entire marktomarket
adjustment for the yeartodate period on a contract classified as an
asset or liability but only include incremental shares for one quarterly
period in a yeartodate calculation of diluted EPS (e.g., a
liabilityclassified option was inthemoney for only one quarterly
period). This result arises from the yeartodate approach used for the
numerator adjustment and the averaging approach used for the denominator
adjustment. However, an entity would never make the numerator adjustment
if no incremental shares were added to the denominator for the
yeartodate period. Similarly, neither the numerator nor the
denominator adjustment would be made if the combined result of those
adjustments was antidilutive for the yeartodate period.
4.9.6 Entities That Do Not Present Interim EPS
Some entities that are not subject to the periodic reporting requirements of the Exchange Act only
present EPS amounts in annual financial statements. In these situations, an entity is not required to
calculate EPS on a quarterly basis so that it can compute EPS amounts on an annual basis. Rather,
the annual period may be treated as a discrete period in the same manner in which a quarterly
financial reporting period is considered a discrete period for SEC registrants that file quarterly financial
statements on Form 10Q. Treating an annual period as a discrete period could result in significantly
different diluted EPS amounts calculated under the treasury stock, reverse treasury stock, and
contingently issuable share methods.
SEC Considerations
The above guidance is not intended to apply to entities
that present diluted EPS in registration statements filed with the SEC.
Such entities must apply the guidance in ASC 260 on yeartodate diluted
EPS to any amounts of diluted EPS that are presented or disclosed.
Footnotes
23
For simplicity, in Section 4.9, we refer to “net
income” as the control number. However, as discussed in Section 4.1.2.2,
for an entity that has dividends on preferred stock, the control number
is income available to common stockholders. For an entity with a
discontinued operation, the control number is income available to common
stockholders from continuing operations. For an entity with an NCI, the
control number is income attributable to common stockholders of the
parent. See further discussion in Table 42.