5.1 Background
This chapter discusses the calculation of EPS by using the two-class method,
which is an earnings allocation formula under which an entity (1) treats a
participating security as having rights to earnings that otherwise would have been
available to common shares and (2) establishes the entitlement to earnings (or
absorption of losses) of multiple classes of common stock. The two-class method
applies to both basic and diluted EPS. Potential common shares or common shares
exchangeable into other classes of common stock are subject to the two-class method
of calculating diluted EPS if the effect is more dilutive than the application of
another dilutive method of calculating diluted EPS (i.e., the treasury stock,
reverse treasury stock, if-converted, or contingently issuable share method).
See Chapter 9 for discussion of presentation and disclosure requirements related to situations in
which an entity has participating securities or multiple classes of common stock and uses the two-class
method to calculate EPS.