Perspectives

Your guide to presentation and disclosure under ASC 260

On the Radar: Earnings per share (EPS)

The complex nature of calculating earnings per share (EPS) doesn’t just affect users—it affects preparers, as well. This On the Radar goes in-depth on the process of calculating basic EPS and diluted EPS and offers guidance for entities as they navigate ASC 260 accounting guidance and arrive at the required accounting conclusions.

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EPS is one of the most prominent financial ratios analyzed by financial statement users. The objective of EPS is to measure the performance of an entity over a financial reporting period. EPS must be presented by entities that (1) have common stock that trades in a public market or (2) file with a regulatory agency for the sale of common stock in a public market.

Entities that present EPS must provide two metrics:

 

On the Radar: Earnings per Share

Many entities also disclose non-GAAP EPS amounts (e.g., diluted EPS adjusted to exclude certain charges or gains). SEC registrants may generally disclose non-GAAP EPS amounts as long as they comply with SEC Regulation S-K, Item 10(a), as interpreted by the SEC staff. Such disclosures must be meaningful, reconciled to GAAP EPS, and not shown with more prominence than GAAP EPS.

The SEC staff closely scrutinizes non-GAAP measures that are included in press releases, Form 8-K filings, and other filings under the Securities Act and Exchange Act and will challenge non-GAAP EPS amounts that do not comply with SEC Regulation S-K, Item 10(a). For example, the disclosure of EBIT or EBITDA per share or per-share amounts that are liquidity measures is prohibited.

ASC 260 addresses the calculation of EPS. ASU 2020-06, which was issued in August 2020, amends U.S. GAAP (including ASC 260) to simplify the accounting for convertible instruments and contracts on an entity’s own stock. ASU 2020-06 is effective for public business entities that are not smaller reporting companies for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. See below for further discussion of ASU 2020-06.

The determination of whether an instrument is a participating security and the use of the two-class method of calculating EPS are two of the most complicated aspects of applying ASC 260. Entities may need to consult with their accounting advisers to appropriately apply ASC 260.

Diluted EPS

Diluted EPS is a per-share performance measure that includes (1) outstanding common shares and (2) additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In calculating diluted EPS, an entity assumes that all dilutive potential common shares within its capital structure were outstanding during the reporting period and that net income (the numerator) was calculated by using a consistent assumption. To determine whether a potential common share is dilutive, entities must apply the antidilution sequencing guidance in ASC 260, which often proves difficult. The complexity of calculating diluted EPS will vary depending on the nature of an entity’s capital structure.

To calculate diluted EPS, an entity makes various adjustments to the numerator and denominator in the calculation of basic EPS to reflect the impact of potential common shares. To do so, the entity uses one of four methods — the treasury stock method, the reverse treasury stock method, the if-converted method, or the contingently issuable share method.

 

In calculating diluted EPS, an entity must adjust the numerator for convertible instruments and other contracts whose accounting classification differs from their EPS treatment (e.g., contracts classified as assets or liabilities that are considered share-settled for diluted EPS purposes). Entities with more complex capital structures may also need to apply the two-class method of calculating diluted EPS.

ASU 2020-06 changes the accounting for diluted EPS for convertible instruments and contracts that may be settled in cash or stock. Before ASU 2020-06 is adopted, entities can overcome the presumption of share settlement for convertible debt and other instruments that can be partially or fully settled in cash at the entity’s election. As a result, entities often reflect the dilutive effect of convertible debt instruments by using the treasury stock method, which is less dilutive than the if-converted method. ASU 2020-06 amends ASC 260 to require that the if-converted method be used for all convertible debt instruments and eliminates an entity’s ability to assume cash settlement for an instrument that may be share-settled.

Presentation and disclosure

ASC 260 requires entities to present basic and diluted EPS with equal prominence on the face of the income statement for each period presented. Under ASC 270-10, the same requirement applies to interim periods. Entities with multiple classes of common stock must present basic and diluted EPS for each class on the face of the income statement. Entities that report a discontinued operation must present basic and diluted EPS on the face of the income statement for income (loss) from continuing operations and net income (loss).

SEC Regulation S-X outlines the format and content required in financial reports filed with the SEC, including the presentation of EPS in annual reports and interim reports filed under the Exchange Act.

ASC 260 requires entities to provide a number of disclosures about EPS. SEC registrants must also furnish the incremental disclosures required by the SEC’s rules and guidance. In some situations, entities must disclose pro forma EPS amounts (i.e., as required by GAAP or the SEC’s rules and guidance). SEC Regulation S-X, Article 11, provides guidance on preparing pro forma financial information.

Entities that disclose per-share measures not required by ASC 260 or other Codification topics, including, but not limited to, non-GAAP EPS amounts, should exercise caution because the SEC staff often challenges the appropriateness or usefulness of such measures.

Continue your earnings per share learning

Deloitte’s Roadmap Earnings per Share provides a comprehensive discussion of the presentation and disclosures of EPS.

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