Deloitte
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Chapter 3 — Basic EPS

3.2 Income Available to Common Stockholders

3.2 Income Available to Common Stockholders

Footnotes

1
These items affect income available to common stockholders either directly (i.e., adjustments to net income to arrive at income available to common stockholders) or indirectly (i.e., adjustments to net income).
2
This Roadmap does not address the date on which cumulative dividends must be recognized by an entity as either a liability or shares of stock. The balance sheet recognition of dividends on cumulative preferred stock will depend on the relevant terms of the preferred stock instrument, including whether dividends must be declared before payment. For guidance on when dividend obligations should be recognized as a liability on the balance sheet, see 505-10-05 (Q&A 08) in Deloitte’s FASB Accounting Standards Codification Manual on DART.
3
A contingency is an event that is not solely within the control of the issuer or holder of the preferred stock.
4
The preferred stock is not considered increasing-rate preferred stock merely because the carrying amount is at a discount to the liquidation preference. See further discussion in Section 3.2.2.3.
5
In all circumstances, an entity should adjust the fair value of the derivative liability through net income immediately before accounting for the settlement.
6
A convertible preferred stock instrument may contain a component that has been separately recognized in common stockholders’ equity. Upon conversion, in conjunction with other relevant guidance, an entity is required to recognize any remaining unamortized discount on the convertible preferred stock as a reduction to net income in arriving at income available to common stockholders. Thus, while ASC 260-10-S99-2 does not apply to a conversion, other guidance requires accounting that results in a “deemed dividend” in a manner similar to the accounting under ASC 260-10-S99-2. See Section 3.2.5.2.4 for further discussion of this guidance, which applies to all entities and not just SEC registrants.
7
See Section 3.2.5.2.3 for discussion of convertible debt that contains a separately classified equity component.
8
ASC 260-10-S99-2 applies to the consolidated financial statements of a parent in the period that includes a modification, an extinguishment, or an induced conversion of preferred stock issued by a consolidated subsidiary that is classified as an NCI.
9
If only the parent absorbed the impact of a dividend or “deemed dividend,” an allocation to NCIs in the form of common stock is not appropriate.
10
See Section 3.2.4.3.1 for guidance on situations in which the repurchase occurs on the basis of the settlement of a forward contract to repurchase common stock.
11
For example, assume that the holder of the shares is a private equity firm and that the issuer repurchases the shares to prevent the holder from obtaining additional board representation or other influence over the entity. The entity should compare the repurchase price with the amount that would be paid to a holder of those shares in a transaction that is not executed to prevent additional board representation or other influence over the entity. It would not be appropriate for the issuer to assume that other private equity investors would also demand repurchase at the same price to avoid obtaining additional board representation or other influence over the entity.
12
Depending on the facts and circumstances, the inducement charge may need to be recognized in earnings rather than being treated as a dividend.
13
Footnote 18 of EITF Topic D-98 is not codified. See Section 3.2.5.2.3 for further discussion of the applicability of this guidance.
14
Allocating to the separately recognized equity component an amount equal to the amount initially recognized for that component differs from the accounting for a redemption of a convertible preferred stock instrument that contains an embedded conversion option that has been reclassified from a derivative liability to a separate component of common stockholders’ equity (discussed below). This difference is justified because only the incremental fair value of the embedded conversion option, as opposed to its entire fair value, is recognized as a result of the modification or exchange that affects the embedded conversion option in a convertible preferred stock instrument.
15
Since the SEC staff has not previously expressed any view on the redemption of convertible preferred stock that contains a separately recognized equity component as a result of a reclassification of the embedded derivative from a liability to equity, it is appropriate to allocate an amount to the equity component on the basis of its fair value on the redemption date in a manner similar to the accounting applied to convertible debt, as discussed in ASC 815-15-40-4.
16
While ASC 260-10-S99-2 does not apply, as noted in Section 3.2.5.2.4, the issuer in a conversion should immediately amortize any remaining unamortized discount on the preferred stock host, which will be treated as a dividend for which net income is adjusted to arrive at income available to common stockholders.
17
See footnote 16 for the accounting for the settlement of the host contract component.
18
While ASC 260-10-S99-2 does not apply, as noted in Section 3.2.2.5.4.1, in a conversion accounted for under this method, the issuer should immediately amortize any remaining unamortized discount on the preferred stock host, which will be treated as a dividend for which net income is adjusted to arrive at income available to common stockholders.
19
While ASC 260-10-S99-2 does not apply, as noted in Section 3.2.4.3, the recognition of a dividend or an expense may be required for a repurchase of common stock for an amount that exceeds the fair value of the common stock repurchased.
20
While ASC 260-10-S99-2 does not apply, as noted in Chapter 6, an expense must be recognized for an induced conversion of a convertible debt instrument.
21
See footnote 20.
22
See footnote 20.
23
While ASC 260-10-S99-2 does not apply, as noted in Section 3.2.2.6.3.1, an inducement will affect net income through the mark-to-market adjustment on the derivative liability.
24
While ASC 260-10-S99-2 does not apply, if an entity settles an equity-classified contract indexed to its common stock under an inducement offer, the additional value resulting from the inducement should be treated as a dividend or an expense. If the value is recognized as a dividend, the amount of the dividend should result in an adjustment to net income to arrive at income available to common stockholders.
25
See footnote 23.
26
See footnote 23.
27
While ASC 260-10-S99-2 does not apply, as noted in Section 3.2.4.1, the additional value resulting from an induced conversion of one class of common stock into another should be accounted for as either a dividend through application of the two-class method of calculating basic EPS or as an expense in a manner consistent with the accounting for reacquisitions of common stock at a price that exceeds fair value.