2.6 Earnings per Share
While SEC comments on earnings per share (EPS) have focused on the calculation
of EPS and related disclosures, more recent comments have also concentrated on the
use of non-GAAP EPS measures. For additional considerations related to non-GAAP
measures, see Section
3.4.
2.6.1 Two-Class Method
Example of an SEC Comment
You disclose . . . that the holders of your preferred stock are entitled to receive non-cumulative dividends in
an amount equal to or greater than those declared to holders of common stock out of funds legally available if
and only when declared by the Board of Directors. Disclose how you considered the two-class method under
ASC 260-10 for your loss per share calculation purpose. Further tell us how you considered including the
preferred stock in the table of potentially dilutive securities that were not included in the calculation of diluted
net loss per share.
Under ASC 260-10-45-59A, the two-class method applies to the following securities:
- 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.
When a filing indicates that the registrant has two classes of common stock (or one class of common
stock and participating securities) that have been treated as a single class in the calculation of EPS, the
SEC staff often asks whether application of the two-class method in the computation of EPS under ASC
260-10-45-59A through 45-70 is required.
The SEC staff may ask a registrant to substantiate the method used to calculate EPS (e.g., the two-class
method or the if-converted method), and it may request additional information or disclosures about
each of the registrant’s classes of common stock, preferred stock, and common-stock equivalents (such
as convertible securities, warrants, or options).
Further, the SEC staff expects that a registrant with two classes of common stock will present both basic
and diluted EPS for each class regardless of whether either class has conversion rights. See Section
2.8.1 for more information about conversion features.
In assessing registrants’ conclusions related to the two-class method, the SEC staff has focused on
understanding the terms of arrangements, including (1) classes and types of common (or preferred)
stock, (2) such stock’s dividend rates, and (3) the rights and privileges associated with each class (or
type) of stock. When a registrant has preferred shares, the SEC staff may seek to determine whether
the preferred stockholders have contractual rights to share in profits and losses of the registrant
beyond the stated dividend rate. Similarly, the SEC staff may ask registrants about the dividend rights of
restricted stock unit awards or other share-based payment awards and how those rights are considered
in the calculation of EPS.
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