5.2 Scope
5.2.1 General
ASC 260-10
Participating Securities and the Two-Class Method
45-59A The capital structures of some entities include:
- Securities that may participate in dividends with common stocks according to a predetermined formula (for example, two for one) with, at times, an upper limit on the extent of participation (for example, up to, but not beyond, a specified amount per share)
- A class of common stock with different dividend rates from those of another class of common stock but without prior or senior rights.
45-60A All securities that meet the definition of a participating security, irrespective of whether the securities
are convertible, nonconvertible, or potential common stock securities, shall be included in the computation of
basic EPS using the two-class method.
ASC 260-10-45-59A and ASC 260-10-45-60A specify that the two-class method of calculating EPS applies
to both participating securities and a “class of common stock with different dividend rates from those of
another class of common stock but without prior or senior rights.” Section 5.3 discusses the definition
of a participating security, and Section 5.4 addresses when an entity must apply the two-class method
because it has multiple classes of common stock.
5.2.2 Entities That Do Not Pay Dividends
Some entities do not regularly pay dividends on common stock. Other entities that do regularly pay
such dividends may not have declared any dividends during a financial reporting period. Even if an entity
does not intend to declare dividends on common stock or did not declare a current-period dividend
and therefore has no distributed earnings, the entity must still apply the two-class method of calculating
EPS if it has participating securities or multiple classes of common stock. Further, such an entity must
allocate current-period undistributed earnings between common shareholders and participating
security holders on the basis of the contractual rights of each security, as if all the earnings for the
period have been distributed.
The terms of covenants associated with debt or equity securities may require entities to obtain approval
from a third party before they can declare and pay dividends on common stock. Similarly, under
regulatory requirements, an entity may need to obtain approval from a regulator before it can declare
and pay dividends on common stock. Because ASC 260 requires an assumption that all earnings for the
period are distributed when an entity has participating securities or multiple classes of common stock,
the entity must apply the two-class method in such cases regardless of whether it has received approval
during the period to declare and pay dividends on common stock.