Chapter 9 — Presentation and Disclosure
Chapter 9 — Presentation and Disclosure
9.1 Presentation
9.1.1 Required EPS Presentation on Face of Income Statement
ASC 260-10
Required EPS Presentation on the Face of the Income Statement
45-2 Entities with simple
capital structures, that is, those with only common
stock outstanding, shall present basic per-share amounts
for income from continuing operations and for net income
on the face of the income statement. All other entities
shall present basic and diluted per-share amounts for
income from continuing operations and for net income on
the face of the income statement with equal
prominence.
45-3 An entity that reports a discontinued operation in a period shall present basic and diluted per-share amounts for that line item either on the face of the income statement or in the notes to the financial statements.
45-4 The terms basic
EPS and diluted EPS are used to identify
EPS data to be presented and are not required to be
captions used in the income statement. There are no
explicit requirements for the terms to be used in the
presentation of basic and diluted EPS; terms such as
earnings per common share and earnings per
common share — assuming
dilution, respectively, are appropriate.
45-7 EPS data shall be presented for all periods for which an income statement or summary of earnings is presented. If diluted EPS data are reported for at least one period, they shall be reported for all periods presented, even if they are the same amounts as basic EPS. If basic and diluted EPS are the same amount, dual presentation can be accomplished in one line on the income statement.
ASC 270-10
Disclosure of Summarized Interim Financial Data by Publicly Traded Companies
50-1 Many publicly traded
companies report summarized financial information at
periodic interim dates in considerably less detail than
that provided in annual financial statements. While this
information provides more timely information than would
result if complete financial statements were issued at
the end of each interim period, the timeliness of
presentation may be partially offset by a reduction in
detail in the information provided. As a result, certain
guides as to minimum disclosure are desirable. (It
should be recognized that the minimum disclosures of
summarized interim financial data required of publicly
traded companies do not constitute a fair presentation
of financial position and results of operations in
conformity with generally accepted accounting principles
[GAAP].) If publicly traded companies report summarized
financial information at interim dates (including
reports on fourth quarters), the following data should
be reported, as a minimum: . . .
b. Basic and diluted earnings per share data
for each period presented, determined in
accordance with the provisions of Topic 260 . . .
.
ASC 260 requires an entity to present basic and diluted EPS (1) “with equal prominence” on the face of the income statement and (2) for each income statement period presented. Under ASC 270-10, the same requirement applies to interim periods.
The concept of materiality does not apply to the requirement to present both basic and diluted EPS on the face of the income statement. As noted in the Background Information and Basis for Conclusions of Statement 128, the FASB
considered that entities generally have to calculate diluted EPS to determine
that the basic and diluted EPS amounts are the same and that “requiring a dual
presentation at all times by all entities with complex capital structures places
all of the facts in the hands of users of financial statements at minimal or no
cost to preparers and gives users an understanding of the extent and trend of
potential dilution.”
An entity that reports a discontinued operation must present basic and diluted
EPS on the face of the income statement for income (loss) from continuing
operations and net income (loss) (or net income [loss] attributable to the
parent for an entity that has an NCI). Otherwise, an entity would only present
basic and diluted EPS for net income (loss) (or net income [loss] attributable
to the parent for an entity that has an NCI). See Sections 9.1.5 and 9.2.2.1 for further
discussion of the EPS presentation and disclosure requirements for discontinued
operations.
SEC Considerations
SEC Regulation S-X outlines the format and content required in financial reports filed with the SEC, including the presentation of EPS in annual reports and interim reports filed under the Exchange Act.
9.1.2 Multiple Classes of Common Stock
ASC 260-10-45-60B(d) requires presentation of basic and diluted EPS for each class of common stock. Therefore, an entity with multiple classes of common stock must present basic and diluted EPS for each class on the face of the income statement.
SEC Considerations
In numerous comment letters, the staff in the SEC’s Division of Corporation
Finance has indicated that an entity with multiple classes of common
stock that have the same amounts of basic and diluted EPS should either
(1) present basic and diluted EPS separately for each class of common
stock on the face of the income statement or (2) clearly state on the
face of the income statement that the amounts of basic and diluted EPS
are the same for each class of common stock.
9.1.3 “Tracking” or “Targeted” Stock
Some entities issue certain classes of stock characterized as “tracking” or
“targeted” stock to measure the performance of one of their business units,
activities, or assets. Under ASC 260-10-45-60B, such entities should use the
two-class method to determine EPS for each class of common stock. See the
previous section for further discussion of presentation considerations related
to multiple classes of common stock.
SEC Considerations
The SEC staff discourages an entity that has issued targeted stock from presenting complete financial statements of the business operations that pertain to the targeted stock, because investors may inaccurately conclude that their investment in such stock represents a direct investment in a legal entity. Rather, condensed financial statements that allow investors to fully understand the computation of earnings available for dividends are preferable to complete statements. A business that has issued targeted stock is also required to provide clear, cautionary disclosures.
Further, the SEC staff has indicated that EPS should not be shown in separate
financial statements of a business unit represented by the tracking
stock because the business unit did not issue the security. Rather, EPS
should only be presented and disclosed in the legal issuer’s
consolidated financial statements or along with its consolidated
information.
9.1.4 Participating Securities
ASC 260 does not require the presentation or disclosure of basic or diluted EPS for securities other than common stock. However, it also does not preclude the presentation of basic and diluted EPS for a participating security other than common stock. See Section 9.2.2.4 for further discussion of the required disclosures for participating securities and Section 9.2.3.3 for more information about the voluntary disclosure of EPS amounts for participating securities.
9.1.5 Discontinued Operations
ASC 205-20 addresses the accounting and presentation considerations related to
discontinued operations. As noted in ASC 260-10-45-3, an entity that reports a
discontinued operation must either present amounts of basic and diluted EPS for
discontinued operations on the face of the income statement or disclose these
amounts in the notes to the financial statements. This requirement is in
addition to the requirement to present basic and diluted EPS for income (loss)
from continuing operations and net income (loss) on the face of the income
statement. See Sections
8.6.3.2.1 and 8.7 for further discussion of the presentation of EPS by an
entity that reports a discontinued operation.
9.1.6 Income or Loss Applicable to Common Stock
SEC Staff Accounting Bulletins
SAB Topic 6.B,
Accounting Series Release 280 — General Revision of
Regulation S-X: Income or Loss Applicable to Common
Stock [Reproduced in ASC 220-10-S99-5]
Facts: A
registrant has various classes of preferred stock.
Dividends on those preferred stocks and accretions of
their carrying amounts cause income applicable to common
stock to be less than reported net income.
Question: In ASR
280, the Commission stated that although it had
determined not to mandate presentation of income or loss
applicable to common stock in all cases, it believes
that disclosure of that amount is of value in certain
situations. In what situations should the amount be
reported, where should it be reported, and how should it
be computed?
Interpretive
Response: Income or loss applicable to common
stock should be reported on the face of the income
statement1 when it is materially
different in quantitative terms from reported net income
or loss2 or when it is indicative of
significant trends or other qualitative considerations.
The amount to be reported should be computed for each
period as net income or loss less: (a) dividends on
preferred stock, including undeclared or unpaid
dividends if cumulative; and (b) periodic increases in
the carrying amounts of instruments reported as
redeemable preferred stock (as discussed in Topic 3.C)
or increasing rate preferred stock (as discussed in
Topic 5.Q).
____________________
1 When a registrant reports
net income and total comprehensive income in one
continuous financial statement, the registrant must
continue to follow the guidance set forth in the SAB
Topic. One approach may be to provide a separate
reconciliation of net income to income available to
common stock below comprehensive income reported on a
statement of income and comprehensive income.
2 The assessment of
materiality is the responsibility of each registrant.
However, absent concerns about trends or other
qualitative considerations, the staff generally will not
insist on the reporting of income or loss applicable to
common stock if the amount differs from net income or
loss by less than ten percent.
SAB Topic 6.B requires SEC registrants to present “income or loss applicable to common stock” on the face of the income statement when the amount materially differs from net income or loss. However, the Codification does not define or otherwise refer to income or loss applicable to common stock. Rather, ASC 260 uses the defined term “income available to common stockholders” (emphasis added) and ASC 260 and ASC 810 refer to net income or loss “attributable to the parent” (although this latter term is not defined).
Since income available to common stockholders is the numerator in an entity’s
computation of EPS under ASC 260, the phrase “income or loss applicable to
common stock,” as referred to in SAB Topic 6.B. can be interpreted as the
equivalent of “income available to common stockholders.” That is, “income or
loss applicable to common stock” would be calculated as consolidated net income
or loss (or consolidated net income or loss attributable to the parent for
entities with an NCI) less preferred stock dividends and any other deductions
required by ASC 260 (see Chapter 3). An entity would compare this amount with
consolidated net income or loss (or consolidated net income or loss attributable
to the parent for entities with an NCI) to determine whether the difference is
material and would therefore need to be disclosed on the face of the income
statement.
When the difference between the aforementioned amounts is material (i.e., generally 10 percent or more, as indicated in footnote 2 of SAB Topic 6.B), an entity must present the numerator amount used in its EPS calculation on the face of the income statement; otherwise, the entity can only disclose this amount in the notes to the financial statements in accordance with ASC 260-10-50-1(a) (see Section 9.2.1). When the amount must be presented on the face of the income statement, an entity may use various terminology to present it (e.g., “income or loss applicable to common stock,” as referred to in SAB Topic 6.B, or “income available to common stockholders [of the parent],” as referred to in ASC 260).
SEC Considerations
SAB Topic 6.B does not address how entities with discontinued operations should
calculate “income or loss applicable to common stock.” However, because
ASC 260 requires presentation of basic and diluted EPS on the face of
the income statement for both income (loss) from continuing operations
and net income (loss), entities that present discontinued operations
should perform the calculations for income (loss) from continuing
operations available to common stockholders separately from those for
income (loss) available to common stockholders. If the difference in the
calculation (or calculations) constitutes a material difference as
described in SAB Topic 6.B, it should be presented on the face of the
income statement; otherwise, the amount(s) may only be disclosed.
9.2 Disclosure
This section details the EPS-related disclosure requirements under
U.S. GAAP (ASC 260 and other Codification topics) and is supplemented by discussion
of various EPS-related disclosures required by the SEC’s guidance. However, this
section does not comprehensively address all per-share disclosures that SEC
registrants must provide in filings made under the Securities Act or Exchange Act.
Accordingly, SEC registrants should consult SEC Regulations S-X and S-K, as well as
other relevant SEC guidance, regarding per-share disclosure requirements.
This section also discusses voluntary disclosures of other per-share
metrics. Appendix B
discusses pro forma EPS disclosures in SEC filings.
9.2.1 Disclosures Required by ASC 260
9.2.1.1 General
ASC 260-10
General
50-1 For each period for
which an income statement is presented, an entity
shall disclose all of the following:
- A reconciliation of the numerators and the denominators of the basic and diluted per-share computations for income from continuing operations. The reconciliation shall include the individual income and share amount effects of all securities that affect earnings per share (EPS). Example 2 (see paragraph 260-10-55-51) illustrates that disclosure. (See paragraph 260-10-45-3.) An entity is encouraged to refer to pertinent information about securities included in the EPS computations that is provided elsewhere in the financial statements as prescribed by Subtopic 505-10.
- The effect that has been given to preferred dividends in arriving at income available to common stockholders in computing basic EPS.
- Securities (including those issuable pursuant to contingent stock agreements) that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because to do so would have been antidilutive for the period(s) presented. Full disclosure of the terms and conditions of these securities is required even if a security is not included in diluted EPS in the current period.
50-1A Per-share amounts not
required to be presented by this Subtopic that an
entity chooses to disclose shall be computed in
accordance with this Subtopic and disclosed only in
the notes to financial statements; it shall be noted
whether the per-share amounts are pretax or net of
tax. (See paragraph 260-10-45-5.)
50-2 For the latest period
for which an income statement is presented, an
entity shall provide a description of any
transaction that occurs after the end of the most
recent period but before the financial statements
are issued or are available to be issued (as
discussed in Section 855-10-25) that would have
changed materially the number of common shares or
potential common shares outstanding at the end of
the period if the transaction had occurred before
the end of the period. Examples of those
transactions include the issuance or acquisition of
common shares; the issuance of warrants, options, or
convertible securities; the resolution of a
contingency pursuant to a contingent stock
agreement; and the conversion or exercise of
potential common shares outstanding at the end of
the period into common shares.
An entity that has multiple classes of common stock must
provide the disclosures required by ASC 260-10-50-1 and 50-2 separately for
each of these classes.
The example in ASC 260-10-55-51 and 55-52 below illustrates
the reconciliation of the numerators and denominators in the calculations of
basic and diluted EPS, which an entity is required to disclose under
ASC 260-10-50-1.
ASC 260-10
Example 2: EPS
Disclosures
55-51 This Example
illustrates the reconciliation of the numerators and
denominators of the basic and diluted EPS
computations for income from continuing operations
and other related disclosures required by paragraph
260-10-50-1 for Entity A in Example 1. Note that
Topic 718 has specific disclosure requirements
related to share-based compensation arrangements.
55-52 The following table
illustrates the computation of basic and diluted EPS
for the year ended 20X1.
Options to purchase 1,000,000
shares of common stock at $85 per share were
outstanding during the second half of 20X1 but were
not included in the computation of diluted EPS
because the options’ exercise price was greater than
the average market price of the common shares. The
options, which expire on June 30, 20Y1, were still
outstanding at the end of year 20X1.
SEC Considerations
SEC Regulation S-X, Rule 10-01(b)(2), states that in
interim reports, “[t]he basis of the earnings per share computation
shall be stated together with the number of shares used in the
computation.” This incremental disclosure requirement exists since
ASC 260 does not specifically require disclosure of the computation
of EPS in interim financial statements. Furthermore, SEC Regulation
S-K, Item 302(a)(1), requires disclosure of EPS information “when
there are one or more material retrospective changes to the
statements of comprehensive income for any of the quarters within
the two most recent fiscal years or any subsequent interim period
for which financial statements are included or are required to be
included by 17 CFR 210.3-01 through 210.3-20 (Article 3 of
Regulation S-X).”
9.2.1.2 Master Limited Partnerships
ASC 260-10
Master Limited
Partnerships
50-3 In the period in which a
dropdown transaction occurs that is accounted for
under the Transactions Between Entities Under Common
Control Subsections of Subtopic 805-50, a reporting
entity shall disclose in narrative format how the
rights to the earnings (losses) of the transferred
net assets differ before and after the dropdown
transaction occurs for purposes of computing
earnings per unit under the two-class method.
See Section 8.9.4 for a discussion of the accounting for
drop-down transactions by an MLP.
9.2.1.3 Shareholder Distributions and Changes in Capital Structure
ASC 260-10
Stock Dividends or Stock Splits
55-12 If the number of common
shares outstanding increases as a result of a stock
dividend or stock split (see Subtopic 505-20) or
decreases as a result of a reverse stock split, the
computations of basic and diluted EPS shall be
adjusted retroactively for all periods presented to
reflect that change in capital structure. If changes
in common stock resulting from stock dividends,
stock splits, or reverse stock splits occur after
the close of the period but before the financial
statements are issued or are available to be issued
(as discussed in Section 855-10-25), the per-share
computations for those and any prior-period
financial statements presented shall be based on the
new number of shares. If per-share computations
reflect such changes in the number of shares, that
fact shall be disclosed.
ASC 260-10-55-12 requires entities to disclose a
retrospective adjustment of previously reported amounts of basic and diluted
EPS as a result of a stock split, stock dividend, or reverse stock split.
While an entity is not specifically required to provide similar disclosures
when previously reported amounts of basic and diluted EPS have been
retrospectively adjusted as a result of a rights issue, the entity should
nevertheless furnish such disclosures.
As discussed in Section 8.2.1.1.2, an entity may file
a Form 10-K or Form 10-Q that does not reflect the impact on equity balances
and EPS of a stock dividend, stock split, or reverse stock split that has
been approved by an SEC registrant’s board of directors and declared before
the issuance of the financial statements (i.e., filing of Form 10-K or Form
10-Q), because the common stock does not yet trade on a post-split basis as
of the filing date (i.e., the stock dividend, stock split, or reverse stock
split has not been consummated as of the filing date). In these
circumstances, SEC registrants should provide relevant disclosures in the
notes to the financial statements, including the following:
-
The significant terms and other relevant facts and circumstances associated with the stock dividend, stock split, or reverse stock split, including the expected timing of the distribution.
-
The impact that the stock dividend, stock split, or reverse stock split will have on the authorized and issued shares of common stock (and other equity accounts affected).
-
The impact that the stock dividend, stock split, or reverse stock split will have on reported EPS.
SEC Considerations
Section 13500 of the FRM states, in part,
“Ordinarily, the staff would not require retrospective revision of
previously filed financial statements that are incorporated by
reference into a registration or proxy statement for reasons solely
attributable to a stock split. Instead, the registration or proxy
statement may include selected financial data which includes
relevant per share information for all periods, with the stock split
prominently disclosed.” While this guidance refers only to stock
splits, it would apply equally to a stock dividend or reverse stock
split that must be retrospectively adjusted under ASC 260.
Note that this view of the SEC staff typically only
applies when financial statements are incorporated by reference into
a registration statement or proxy statement; an SEC registrant would
generally be expected to retrospectively revise historical financial
statements for a stock split, stock dividend, or reverse stock split
when financial statements are included in a registration statement
or proxy statement.
9.2.1.4 Prior-Period Adjustments
ASC 260-10
Prior-Period Adjustments
55-15 If authoritative
literature requires that a restatement of the
results of operations of a prior period be included
in the income statement or summary of earnings, then
EPS data given for the prior period or periods shall
be restated. The effect of the restatement,
expressed in per-share terms, shall be disclosed in
the period of restatement.
A correction of an error in previously reported financial
statements is subject to the disclosure guidance in ASC 260-10-55-15 and
ASC 250-10-50-7 through 50-11 (see Section 9.2.2.2).
9.2.2 Disclosures Required by Other Codification Topics
9.2.2.1 Discontinued Operations
ASC 205-20-50-5B and 50-5C, along with ASC 260-10-45-3 and
ASC 270-10-50-7(k), require entities to disclose the effects of discontinued
operations on EPS.
9.2.2.2 Accounting Changes and Error Corrections
ASC 250 describes four types of accounting changes: (1)
change in accounting principle, (2) change in accounting estimate, (3)
change in reporting entity, and (4) correction of an error in previously
issued financial statements (i.e., a restatement). Entities are required to
provide specific disclosures, including certain EPS-related disclosures, for
each of these types of changes. The table below summarizes the EPS-related
disclosure requirements in ASC 250.
Table
9-1
Type | Codification References | Disclosure Requirement(s) |
|---|---|---|
Change in accounting principle | ASC 250-10-50-1(b)(2), ASC 250-10-50-1(c), and
ASC 250-10-50-3 | Entities should disclose the “effect of the
[retrospective application of the] change [in
accounting principle] on . . . any affected
per-share amounts for the current period and any
prior periods retrospectively adjusted.” Entities that recognize indirect
effects of a change in accounting principle should
disclose a “description of the indirect effects . .
. and the related per-share amounts” for the current
period and each prior period presented. “In the fiscal year in which a new
accounting principle is adopted, financial
information reported for interim periods after the
date of adoption shall disclose the effect of the
change on . . . related per-share amounts . . . for
those post-change interim periods.” |
Change in accounting estimate | ASC 250-10-50-4 | Entities should disclose the “effect on . . . any
related per-share amounts of the current period . .
. for a change in estimate that affects several
future periods.” “When an
entity effects a change in estimate by changing an
accounting principle, the disclosures required by
paragraphs 250-10-50-1 through 50-3 [for a change in
accounting principle] also are required.”
|
Change in reporting entity | ASC 250-10-50-6 | “When there has been a change in the reporting
entity, the financial statements of the period of
the change shall describe the nature of the change
and the reason for it [and] . . . the effect of the
change on . . . any related per-share amounts shall
be disclosed for all periods presented.” |
Correction of an error in previously issued
financial statements | ASC 250-10-50-7 and ASC 250-10-50-11 | Previously Issued Financial
Statements
When an entity has corrected an
error by restating financial statements, it should
disclose the “effect of the correction on . . . any
per-share amounts affected for each prior period
presented.” Prior Interim Periods of the
Current Fiscal Year
“In financial reports for the
interim period in which the adjustment [to prior
interim periods of the current fiscal year] occurs,
disclosure shall be made of . . . [t]he effect [of
the restatement on] related per-share amounts for
each prior interim period of the current fiscal year
[and the] related per-share amounts for each prior
interim period restated.” |
SEC Considerations
SEC Regulation S-K, Item 302(a)(1), and SEC
Regulation S-X, Rule 10-01(b)(7), require registrants to provide
additional disclosures when material retrospective prior-period
adjustments have been made in interim financial statements.
9.2.2.3 Convertible Debt
An entity that has entered into a lending arrangement on its
own shares in conjunction with a convertible debt issuance is subject to the
disclosure requirements in ASC 470-20-50-2A through 50-2C. For example,
ASC 470-20-50-2C may require an entity to disclose the number of common
shares related to a share-lending arrangement that would be reflected in
basic and diluted EPS if the counterparty to the arrangement were to
default. See Section
8.5 for further discussion of own-share lending arrangements.
9.2.2.4 Participating Securities
ASC 260-10-55-24 indicates that the participation rights of
a participating security must be disclosed in accordance with ASC 505-10,
regardless of whether undistributed earnings are allocated to the
participating security. In addition, when EPS is not separately presented
for participating securities, the amount of earnings allocated to such
securities should be disclosed, as a reconciling item, in the disclosures
related to the calculation of basic EPS. See also Sections 5.5.1.1 and 5.5.2.3 for
discussion of certain accounting policies related to participating
securities that should be disclosed.
9.2.2.5 Employee Stock Ownership Plans
An employer that sponsors an employee stock ownership plan
is subject to the disclosure requirements in ASC 718-40-50-1. Required
disclosures include a description of the treatment of ESOP plan shares in
EPS computations and the amount and treatment in EPS calculations of the tax
benefit related to dividends paid to any ESOP, if material. In complying
with the disclosure requirement in ASC 718-40-50-1(b), if an employer has
both grandfathered ESOP shares to which it continues to apply SOP 76-3 and
ESOP shares that are accounted for under ASC 718-40, the accounting policies
for both blocks of shares should be disclosed. An entity should also
separately disclose the EPS treatment for each block of shares. See
Section 7.2
for further discussion of the EPS implications of ESOPs.
9.2.2.6 Common-Control Business Combinations
ASC 805-50-50-2 and 50-3 contain disclosure requirements
applicable to the receiving entity in a transfer of net assets among
entities under common control. ASC 805-50-50-2 states that “[t]he nature of
and effects on [EPS] of nonrecurring intra-entity transactions involving
long-term assets and liabilities is not required to be eliminated under the
guidance in paragraph 805-50-45-3 but shall be disclosed.”
If the receiving entity is required to disclose EPS in its
separate financial statements and presents the common-control transfer as a
change in the reporting entity, EPS amounts must be recast to include the
earnings (or losses) of the transferred net assets (see further discussion
in Section
8.6.2). In addition to the disclosures required by
ASC 805-50, if the net assets transferred result in a change in the
reporting entity, the receiving entity must provide the disclosures required
by ASC 250-10-50-6, including the per-share disclosures discussed in
Table 9-1.
9.2.2.7 Reorganizations
ASC 852-10 requires that EPS be reported in accordance with
ASC 260. ASC 852-10-45-16 states, in part, that “[i]f it is probable that
the plan [of reorganization] will require the issuance of common stock or
common stock equivalents, thereby diluting current equity interests, that
fact shall be disclosed.”
9.2.2.8 Pro Forma Financial Information
See Appendix B for discussion of disclosures of supplemental pro
forma EPS.
9.2.3 Disclosures of Other Per-Share Metrics
9.2.3.1 General
ASC 260-10
Required EPS Presentation on
the Face of the Income Statement
45-5 Per-share amounts not
required to be presented by this Subtopic that an
entity chooses to disclose shall be computed in
accordance with this Subtopic and disclosed only in
the notes to financial statements; it shall be noted
whether the per-share amounts are pretax or net of
tax. (See paragraph 260-10-50-1A.)
45-6 Paragraph 230-10-45-3
prohibits reporting an amount of cash flow per
share.
Participating Securities
and the Two-Class Method
45-60 The two-class method is
an earnings allocation formula that treats a
participating security as having rights to earnings
that otherwise would have been available to common
shareholders but does not require the presentation
of basic and diluted EPS for securities other than
common stock. The presentation of basic and diluted
EPS for a participating security other than common
stock is not precluded.
Entities may wish to disclose per-share data beyond that
required by ASC 260. ASC 260-10-45-5 allows disclosure of such other
per-share amounts in the notes to the financial statements provided that the
per-share amounts are accompanied by disclosure of whether they are pretax
or net of tax. These other per-share amounts should be calculated in
accordance with ASC 260 and should not be presented on the face of the
income statement. Examples of other per-share amounts include dividends per
share and book value per share.
SEC Considerations
SEC registrants are required to disclose the amount
of dividends per share for each class of shares (as opposed to
common stock only) in both interim and annual reports filed under
the Exchange Act. Such amounts can be disclosed on the face of the
income statement or in the notes to the financial statements.
SEC registrants may also be required to disclose
certain metrics related to book value per share in certain filings.
For example, SEC Regulation S-K, Item 506, requires registrants to
disclose net tangible book value per share before and after a
distribution in certain IPOs of common stock when there is a
substantial disparity between the public offering price and the
offering price previously paid by officers, directors, promoters,
and affiliates. In addition, for business combinations subject to
SEC Regulation M-A, Item 1010(a)(4), entities must disclose book
value per share as of the date of the most recent balance sheet
presented.
With respect to other per-share amounts that an
entity wishes to disclose in filings with the SEC, including, but
not limited to, amounts related to book value per common share that
do not need to be disclosed under U.S. GAAP or the SEC’s guidance,
the entity must consider the SEC’s guidance on non-GAAP disclosures.
Any such disclosure that is not considered to involve a prohibited
non-GAAP financial measure should be accompanied by a description of
how such per-share amounts have been calculated.
9.2.3.2 Comprehensive Income
An entity may voluntarily disclose comprehensive income per
share in the notes to the financial statements, provided that:
- In the presentation, the per-share amount for comprehensive income is not more prominent than that for net income, which could potentially cause confusion.
- The disclosure is included in a comprehensive income footnote (it may not be included on the face of the income statement).
- The disclosure is provided for all periods presented.
- The calculation is consistent with the calculation of basic EPS in ASC 260 and is performed on a net-of-tax basis. (The calculation does not need to include a diluted EPS amount.)
9.2.3.3 Participating Securities
The presentation of basic and diluted EPS for participating
securities is permitted but not required under ASC 260-10-45-60. When an
entity chooses to disclose EPS for participating securities, the EPS amounts
should be calculated in accordance with ASC 260 and the entity should
disclose amounts of both basic and diluted EPS. When an entity has more than
one class of participating securities and chooses to disclose EPS, the
entity would generally disclose basic and diluted EPS for all classes of
participating securities. EPS amounts for participating securities should be
disclosed in the notes to the financial statements.
9.2.3.4 Non-GAAP Measures
C&DIs — Non-GAAP Financial
Measures
Question
102.05
Question:
While Item 10(e)(1)(ii) of Regulation S-K does not
prohibit the use of per share non-GAAP financial
measures, the adopting release for Item 10(e),
Exchange Act Release No. 47226, states that “per
share measures that are prohibited specifically
under GAAP or Commission rules continue to be
prohibited in materials filed with or furnished to
the Commission.” In light of Commission guidance,
specifically Accounting Series Release No. 142,
Reporting Cash Flow and Other Related Data,
and Accounting Standards Codification 230, are
non-GAAP earnings per share numbers prohibited in
documents filed or furnished with the
Commission?
Answer: No.
Item 10(e) recognizes that certain non-GAAP per
share performance measures may be meaningful from an
operating standpoint. Non-GAAP per share performance
measures should be reconciled to GAAP earnings per
share. On the other hand, non-GAAP liquidity
measures that measure cash generated must not be
presented on a per share basis in documents filed or
furnished with the Commission, consistent with
Accounting Series Release No. 142. Whether per share
data is prohibited depends on whether the non-GAAP
measure can be used as a liquidity measure, even if
management presents it solely as a performance
measure. When analyzing these questions, the staff
will focus on the substance of the non-GAAP measure
and not management’s characterization of the
measure. [May 17, 2016]
Although SEC Regulation S-K, Item 10(e), does not
specifically prohibit the disclosure of non-GAAP per-share financial
measures, such disclosures are not permitted by either U.S. GAAP or SEC
rules in certain instances, including the following:
- Cash flow per share and other per-share measures of liquidity — ASC 230-10-45-3 states that “[f]inancial statements shall not report an amount of cash flow per share. Neither cash flow nor any component of it is an alternative to net income as an indicator of an entity’s performance, as reporting per-share amounts might imply.” The SEC’s guidance in ASR 142 (FRR 202.04) contains a similar prohibition. Free cash flow is a liquidity measure and, therefore, per-share presentation is expressly prohibited. In addition, C&DI Question 103.02 notes that EBIT or EBITDA should not be presented on a per-share basis. The C&DI does not discuss the presentation of EPS related to adjusted EBIT or adjusted EBITDA. The determination of whether such presentation is acceptable may depend on the nature of the adjustment and whether the measure is clearly, in substance, a liquidity measure. See Section 4.4 of Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics for further discussion.
- Per-share measures derived from prohibited non-GAAP measures — Registrants are not allowed to disclose a non-GAAP per-share measure that is derived from a prohibited non-GAAP financial measure. That is, the numerator in the non-GAAP per-share measure must be a non-GAAP measure permitted by SEC Regulation S-K, Item 10(e). See discussion below regarding the denominator.
Registrants may generally disclose other non-GAAP per-share
performance measures as long as they comply with other SEC
requirements for such measures (including the reconciliation to GAAP EPS).
C&DI Question 102.05 indicates that in a registrant’s discussion of its
operations, certain non-GAAP per-share performance measures “may be
meaningful.” However, the C&DI also specifies that the SEC staff may
challenge measures designated as performance measures that appear to be more
like liquidity measures (i.e., the staff will look at the substance of the
disclosure, not necessarily its form of characterization). When a
performance measure can be used as a liquidity measure, per-share
presentation of the measure is prohibited. See Section 3.2.2 of Deloitte’s Roadmap
Non-GAAP Financial
Measures and Metrics for more information.
Registrants are reminded to comply with all disclosure
requirements in Item 10(e), including the requirement to reconcile both the
numerator and denominator. A reconciliation of the denominator is not
necessary, however, if the denominator represents diluted shares in
accordance with ASC 260. If the denominator does not represent diluted
shares, registrants should use caution in presenting the measure and
consider whether the resulting measure could potentially be misleading. As
noted in footnote 49 of SEC Final Rule
33-8176, an SEC registrant should carefully consider
whether (1) it is appropriate to use any denominator other than diluted
shares calculated in accordance with ASC 260 and (2) the resulting measure
could potentially be misleading.
SEC Considerations
The SEC’s guidance on disclosure of non-GAAP
per-share amounts applies to both filings made under the Securities
Act or Exchange Act and documents furnished to the SEC. For example,
the SEC’s guidance on disclosure of non-GAAP per-share amounts must
be applied to non-GAAP information included in a press release,
which is furnished to the SEC in accordance with Form 8-K, Item
2.02.
In addition to disclosing non-GAAP per-share amounts,
entities may wish to explain the impact of certain one-time or unusual items
on reported EPS. An SEC registrant is generally permitted to disclose in
MD&A the individual effect of individual transactions or items on
GAAP-reported EPS amounts (e.g., the per-share impact of a significant
charge or gain) even if the presentation of EPS, excluding the individual
effect of the transaction or item, would otherwise be considered a
prohibited non-GAAP measure. This is consistent with the interpretive
response to Question 3 of SAB Topic 5.P.3, which indicates that
“[d]iscussions in MD&A and elsewhere which quantify the effects of
unusual or infrequent items on net income and earnings per share are
beneficial to a reader’s understanding of the financial statements and are
therefore acceptable.”
Below is an example of a disclosure of the EPS impact of a
nonrecurring gain.
SEC — Example Disclosure in MD&A
Included on Form 10-K
During fiscal 2017, the Company
completed the divestiture of four product
categories, which included 43 of the Company’s
beauty brands (“Beauty Brands”), including the
global salon professional hair care and color,
retail hair color, cosmetics and the fine fragrance
businesses, along with select hair styling brands.
The Beauty Brands had historically been part of the
Company’s Beauty reportable segment. The results of
the Beauty Brands are presented as discontinued
operations and, as such, are excluded from both
continuing operations and segment results for all
periods presented. Additionally, the Beauty Brands
balance sheet positions as of June 30, 2016 are
presented as held for sale in the Consolidated
Balance Sheets. The Company recorded an after-tax
gain on the final transaction of $[X] billion ($[Y]
per share), net of transaction and related
costs.
See Deloitte’s Roadmap Non-GAAP Financial Measures and
Metrics for more detailed discussion regarding the
disclosure of non-GAAP per-share amounts.