5.4 Definition of Multiple Classes of Common Stock

ASC 260 only explicitly requires application of the two-class method when an entity has multiple classes of common stock with different dividend rates and the same level of subordination. Nevertheless, an entity should apply the two-class method of calculating EPS when it has multiple classes of common stock, regardless of whether (1) the dividend rates of each class are the same or (2) one class has senior or prior rights. In comment letters, the staff in the SEC’s Division of Corporation Finance has previously expressed its view that ASC 260-10-45-60B(d) requires an entity with multiple classes of common stock to present basic and diluted EPS for each class even if the classes have the same dividend rates; thus, an entity should either (1) present basic and diluted EPS for each class of common stock separately on the face of the income statement or (2) present a single basic and diluted EPS on the face of the income statement and clearly disclose that the EPS amounts pertain to each class of common stock. An entity that chooses the latter option cannot simply assume that the amounts of basic and diluted EPS for each class are the same. Rather, before reaching such a conclusion, the entity must calculate basic and diluted EPS. It is possible for EPS amounts to differ for multiple classes of common stock that have the same dividend rates. For example, a participating security may only participate in dividends ratably with one class of common stock, which could have an impact on the calculation of basic EPS for that class of common stock. (Section 5.5.3.2 discusses another situation in which a difference in basic EPS may arise.) In addition, in the calculation of diluted EPS for multiple classes of common stock, potential common shares are included on the basis of the more dilutive of the two-class method or another relevant dilutive method. As a result, there could be different amounts of diluted EPS for multiple classes of common stock with the same dividend rates.

When an entity has issued common stock that is redeemable at an amount other than fair value and must be remeasured to its redemption amount under ASC 480-10-S99-3A, the security is treated in the same manner as a separate class of stock in accordance with ASC 480-10-S99-3A(21). (See further discussion in Section 5.5.3.1.) An NCI in the form of common stock that is redeemable at an amount other than fair value and must be remeasured to its redemption amount under ASC 480-10-S99-3A may also need to be treated as a separate class of stock in the calculation of basic and diluted EPS at the subsidiary level.4 See further discussion in Section 5.5.2.5.4.

Some entities have issued classes of stock characterized as “tracking” or “targeted” stock, which measure the performance of a specific business unit, activity, or asset of the entity. Shares of tracking stock are traded as separate securities although they typically do not have any specific claim on the related assets and may have limited or no voting rights. According to ASC 260-10-45-60B, an entity with tracking stock must use the two-class method to calculate and present EPS for each class of common stock. The two-class method should be applied on the basis of the separate earnings attributed to each class of stock, which represents the actual distributions, if any, to the respective classes of stock and undistributed earnings available for payment of dividends on these classes. An entity should show basic and diluted EPS for each class of tracking stock on the face of the income statement. See Sections 3.2.4.3.3, 4.8.4.5, and 9.1.3 for further discussion of EPS accounting matters applicable to tracking stock.