4.5 Earnings per Share

Treatment of mandatorily redeemable common shares and forward contracts that require physical settlement of a fixed number of shares for cash

Forward contracts for which physical settlement of a fixed number of shares for cash is required are treated as follows:

• Basic EPS — The shares are considered outstanding (and any earnings impact is included in the numerator).
• Diluted EPS — The reverse treasury stock method is applied to the extent that the instrument is dilutive.

Mandatorily redeemable common shares (basic and diluted EPS) are treated as follows:

• These shares are typically excluded from the denominator.

Basic EPS — The common shares (and any related earnings effect) that are to be redeemed or repurchased are excluded from the calculation of EPS. The two-class method of calculating EPS is applied.

Diluted EPS — No further adjustments to the numerator or the denominator are necessary.

Treatment of mandatorily convertible instruments

Ordinary shares that will be issued upon conversion are considered outstanding in the calculation of basic EPS from the date the contract is entered into, irrespective of whether the contract is participating. The result is similar to that achieved by applying the two-class method, but the presentation differs. However, the EPS result differs from that calculated under U.S. GAAP when the instrument is not a participating security.

For diluted EPS, the shares are considered outstanding and no adjustment is made to the numerator.

If the instrument is a participating security, entities should apply (1) the two-class method (the results of doing so are similar to those achieved when an entity considers the shares outstanding) to calculate basic EPS and (2) the more dilutive of the two-class method or if-converted method to calculate diluted EPS.

If the instrument is not a participating security, entities do not adjust the numerator or denominator in computing basic EPS. The if-converted method is applied to calculate diluted EPS.

Application of the two-class method to participating securities

The two-class method applies only to participating securities that are equity instruments. It is not required for participating debt instruments (e.g., participating convertible debt). There is no detailed guidance on such application.

The two-class method applies to participating securities irrespective of whether they are debt or equity instruments. ASC 260 includes detailed guidance on such application.

Diluted EPS denominator difference: treasury stock method — year-to-date (YTD) computation

For YTD diluted EPS, the number of incremental shares included in the denominator is determined by using a weighted average of the number of incremental shares included in each quarterly calculation of diluted EPS.

Diluted EPS denominator difference: contingently issuable shares — YTD computation

For YTD computations, the number of contingent shares included in the denominator of diluted EPS is determined by weighting the interim periods.

Diluted EPS denominator difference: contingently convertible instruments

Shares issuable upon the conversion of a contingently convertible instrument are included in the calculation of diluted EPS if the contingency has been met as of the reporting date. The nature of the contingency that must be met for conversion to occur is not relevant.

Shares issuable upon the conversion of a convertible instrument that contains a market price trigger are included in the calculation of diluted EPS regardless of whether the market price trigger has been met as of the reporting date. If a convertible instrument becomes convertible only if a substantive non-market-based contingency is met, the shares are included in the calculation of diluted EPS only if the non-market-based contingency has been met as of the reporting date.