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Section 2300: Earnings per Share
[U.S. GAAP Codification Topic]
260 Earnings per Share
260-10 Overall
[U.S. GAAP before the Codification]
SFAS 128, February 1997, Earnings per Share
1. Basic EPS
Basic EPS = (A) / (B)
(A) = income available for common stockholders
(B) = weighted-average number of common shares outstanding
2. Diluted EPS
Diluted EPS = (C) / (D)
(C) = (A) + (A1)
(D) = (B) + (B1)
(A1) The effects of dilutive potential common shares (DPCS) on income
(B1) The effects of dilutive potential common shares (DPCS) on number of shares
DPCS = Dilutive Potential Common Shares
3. Potential common shares
(1) convertible securities
(2) options
(3) warrants
(4) contingent stock agreements
4. Dilutive
--> if the effect of potential common shares is
--> a "decrease" in EPS
5. Antidilutive
--> if the effect of potential common shares is
--> an "increase" in EPS
6. The effects of DPCS on income
--> add back (A2) and (A3) to income
(A2) dividends to convertible preferred shares
(A3) interest for convertible debt
7. The effects of DPCS on number of shares
--> add (B2) to the number of shares
(B2) net increase in common shares = (B3) - (B4)
(B3) additional common shares assumed to be issued
(B4) number of shares assumed to be bought back
--> using the proceeds from the exercise of options and warrants
8. "If-converted method" for convertible securities
(1) It is assumed that convertible securities were converted
--> at the beginning of the period
--> or at the time of issuance if issued during the period
(2) Add additional number of common shares
--> that would have been issued if they were converted
(3) For convertible preferred shares
--> add back dividends to convertible preferred shares to income
(4) For convertible debt
--> add back interest for convertible debt to income
9. "Treasury stock method" for written call options and warrants
(1) It is assumed that call options were exercised
--> at the beginning of the period
(2) At the time of exercise
--> option holders will pay exercise price per share
--> to get common shares
(3) It is assumed that the proceeds were used
--> to buy back its own common shares in the market
--> at the average market price during the period
(4) Net increase in common shares will be the difference between (a) and (b)
(a) number of shares issued due to assumed exercise of options and warrants
(b) number of shares assumed to be purchased back in the market using the proceeds of (a)
10. An example of written call options
Entity A sold call options for 600 shares of common stock
--> exercise price = $100
--> average market price = $120
Proceeds from the assumed exercise = 600 shares x $100 = $60,000
Number of treasury shares assumed to be bought back = $60,000 / $120 = 500 shares
Entity A is assumed to sell 600 shares and buy 500 shares
Increase in the number of shares = 600 - 500 = 100 shares
11. "Reverse treasury stock method" for written put options
(1) When a put option is exercised
--> option holder will ask the entity to buy back common shares
(2) It is assumed that the entity will issue sufficient common shares
--> to raise enough proceeds to buy back common shares from the holders of put option
--> at the beginning of the period
--> at the average market price during the period
(3) It is assumed that the proceeds were used
--> to buy back common shares from the holders of put option
(4) Net increase in common shares will be the difference between (c) and (d)
(c) number of shares assumed to be issued to raise enough proceeds
(d) number of shares assumed to be purchased back from the holders of put option
12. An example of written put options
Entity A sold put options for 400 shares of common stock
--> exercise price = $100
--> average market price = $80
Proceeds required to purchase 400 shares at $100 = 400 shares x $100 = $40,000
Number of shares issued to raise $40,000 --> $40,000 / $80 = 500 shares
Entity A is assumed to issue 500 shares at the beginning of the period at $80 per share
Entity A is assumed to issue 500 shares and buy 400 shares
Increase in the number of shares = 500 - 400 = 100 shares
13. Purchased call options
Options will be exercised only if EP < MP
EP: Exercise Price
MP: Market Price
If EP < MP, the effect of purchased call option is antidilutive
14. An example of purchased call options
Entity A purchased call options for 600 shares of common stock
--> exercise price = $100
--> average market price = $120
Proceeds required to buy 600 shares --> 600 shares x $100 = $60,000
Number of shares issued to raise $60,000 --> $60,000 / $120 = 500 shares
Entity A is assumed to issue 500 shares and buy 600 shares
Number of shares decreases --> antidilutive
15. Purchased put options
Options will be exercised only if MP < EP
If MP < EP, the effect of purchased put option is antidilutive
16. An example of purchased put options
Entity A purchased put options for 400 shares of common stock
--> exercise price = $100
--> average market price = $80
Proceeds from the assumed exercise = 400 shares x $100 = $40,000
Number of treasury shares assumed to be bought back = $40,000 / $80 = 500 shares
Entity A is assumed to sell 400 shares and buy 500 shares
Number of shares decreases --> antidilutive
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