REACQUIRED SHARES
The number of reacquired shares is time-weighted for the
fraction of the year they were not outstanding, prior to being
subtracted from the number of shares outstanding.
Sovran Financial Corporation reported net income of $154
million in 2016 (tax rate 40%). Its capital structure included:
Common stock
Basic EPS:
(amounts in millions, except per share amount)
net
income
$154 $154
= = $2.05
60 (1.10) + 12 (10/12) (1.10) – 8 (3/12) 75
T19-14
19-22 Intermediate Accounting, 8/e
EARNINGS AVAILABLE TO COMMON SHAREHOLDERS
Preferred dividends are subtracted from net income so that
Sovran Financial Corporation reported net income of $154
million in 2016 (tax rate 40%). Its capital structure included:
Common stock
January 1 60 million common shares were outstanding
Preferred stock, nonconvertible
January 1-December 31 5 million 8%, $10 par, shares
Basic EPS:
(amounts in millions, except per share amount)
net preferred
income dividends
COMPLEX CAPITAL STRUCTURE
Potential common shares — Securities that, while not being
common stock, may become common stock through their
Complex capital structure — If potential common shares are
outstanding
A firm with a complex capital structure reports two EPS
calculations:
Basic EPS ignores the dilutive effect of potential
T19-16
19-24 Intermediate Accounting, 8/e
OPTIONS, RIGHTS, AND WARRANTS
Stock options, stock rights, and stock warrants give their holders the right to exercise
their option to purchase common stock, usually at a specified exercise price. The
dilution that would result from their exercise should be reflected in the calculation of
diluted EPS.
Incentive stock options
*adjusted for the stock dividend
Basic EPS (amounts in millions, except per share amounts)
net preferred
adjustment
Diluted EPS
net preferred
income dividends
$154 – $4 $150
Proceeds for Calculating Reacquired Shares
The “proceeds” for the calculation should include:
2. the total compensation from the award that’s not yet expensed. If
the fair value of an option had been $4 at the grant date, the total
3. the “excess tax benefit.” We expense the fair value of stock options at
the date of grant. If the options were non-qualified options, the
corporation receives a tax deduction at exercise equal to the difference
between the stock’s market value and its exercise price. In our
T19-18
19-26 Intermediate Accounting, 8/e
Restricted Stock Awards in EPS Calculations
Restricted stock awards are included using the treasury stock method.
That is, the shares are added to the denominator and then reduced by
The proceeds for the EPS calculation include the total compensation
that’s not yet expensed. For an example, assume total compensation
No adjustment to the numerator
5 million – 3.75* million = 1.25 million
*Assumed purchase of treasury shares
The proceeds would be increased (or decreased) by any tax benefits
that would be added to (or deducted from) paid-in capital when the
CONVERTIBLE SECURITIES
For Diluted EPS, conversion into common stock is assumed
The numerator is increased by the interest (after-tax) or
T19–20
19-28 Intermediate Accounting, 8/e
CONVERTIBLE BONDS
Common stock
January 1 60 million common shares were outstanding
March 1 12 million new shares were sold
Convertible bonds
10%, $300 million face amount issued in 2015, convertible into 12 million
common shares*
*adjusted for the stock dividend
Basic EPS (amounts in millions, except per share amounts)
$2.00 as before
Diluted EPS
net preferred after-tax
income dividends interest savings
CONVERTIBLE PREFERRED STOCK
Assume the preferred stock is convertible into common shares:
Preferred stock, convertible
*adjusted for the stock dividend
Basic EPS (amounts in millions, except per share amounts)
net preferred
income dividends
Diluted EPS
net preferred after-tax
income dividends interest savings
T19–22
19-30 Intermediate Accounting, 8/e
ANTIDILUTIVE SECURITIES
At times, the effect of the conversion or exercise of potential
Stock warrants
Warrants granted in 2015, exercisable for 4 million common
The $32.50 exercise price is higher than the market price,
CONTINGENTLY ISSUABLE SHARES
At times, contingent shares are issuable to shareholders of an
When calculating EPS, contingently issuable shares are
considered to be outstanding in the computation of diluted
Assumed issuance of contingently issuable shares (diluted
EPS):
no adjustment to the numerator
T19-24
19-32 Intermediate Accounting, 8/e
FINANCIAL STATEMENT PRESENTATION
Basic and diluted EPS data are reported on the face of the
income statement for all periods presented. Companies
without potential common shares present basic EPS only.
Disclosure notes should provide additional disclosures
including:
A reconciliation of the numerator and denominator used in
When the income statement includes discontinued
operations, EPS data (both basic and diluted) must also be
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Earnings per Share. FASB ASC 260 – Earnings per Share was
issued as part of a joint project with the IASB to eliminate