5.10 Earnings per Share | DART – Deloitte Accounting Research Tool

Public entities must comply with ASC 260, which provides guidance on calculating and presenting EPS for common stock. For each period presented, entities are required to present basic EPS (i.e., income available to common stockholders divided by the weighted-average number of common shares outstanding) and diluted EPS, which includes the total weighted-average number of common shares of the entity’s potential common stock that would dilute basic EPS if actually issued.

An IPO commonly involves changes in capital structure (see Section 5.6.2), including both simple reclassifications and other, more complex changes that may even occur for the same equity security. Section 8.6.2 of Deloitte’s Roadmap Earnings per Share provides examples illustrating changes in capital structure and the related impact on reported amounts of EPS, as well as an overview of the FRM guidance on the EPS accounting for changes in capital structure at or before closing an IPO. (ASC 260 does not contain such guidance.) While this guidance specifically applies to changes in capital structure that occur in conjunction with an IPO, it would also be relevant to other changes in capital structure.

Presentation and disclosure of EPS can be affected by the structure and substance of the transactions to effect an IPO (see Section 5.2). Section 8.6.3 of Deloitte’s Roadmap Earnings per Share provides an overview of EPS accounting considerations related to IPOs of entities that were previously part of a larger entity, including spin-offs and other dispositions. This guidance applies to such IPOs even if those share offerings are not spin-offs from a legal perspective.

ASC 260 also provides additional guidance specific to share-based compensation. An entity should carefully analyze share-based compensation arrangements to determine the EPS impact on the basis of the substance of the arrangements. For example, shares may be legally outstanding; however, for EPS purposes, unvested shares are not treated as being issued but are instead viewed as potentially dilutive and incorporated into the calculation of diluted EPS. For more information about the impact of share-based payment awards on EPS, see Section 12.4 of Deloitte’s Roadmap Share-Based Payment Awards.

For more information about the presentation and disclosure of EPS, see Deloitte’s Roadmap Earnings per Share, especially Section 8.6.2.1, which provides an overview of common ways in which ASC 260 is misapplied in an IPO.