7.3 Types of EPS computations

Basic EPS is computed by dividing income available to common stockholders by the number of weighted average common shares outstanding during the period.

Definition from ASC 260-10-20

Basic Earnings Per Share: The amount of earnings for the period available to each share of common stock outstanding during the reporting period.

Figure FSP 7-1 provides a summary of basic EPS. Figure FSP 7-1
Summary of basic EPS * Presumes the securities are not considered participating securities See FSP 7.4 for further discussion of basic EPS.

7.3.2 Diluted EPS

Diluted EPS is computed by dividing income available to common stockholders, adjusted for the effects of the presumed issuance of potential common shares, by the number of (1) weighted average common shares outstanding, plus (2) potentially issuable shares, such as those that result from the conversion of a convertible instrument or exercise of a warrant.

Definition from ASC 260-10-20

Diluted Earnings Per Share: The amount of earnings for the period available to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period.

In other words, diluted EPS is basic EPS adjusted for the hypothetical effect of potentially dilutive securities. Figure FSP 7-2 provides a summary of diluted EPS.

Figure FSP 7-2
Summary of diluted EPS See FSP 7.5 for further discussion of diluted EPS.

7.3.3 Presentation of basic and diluted EPS

EPS should be presented for income from continuing operations, if applicable, and for net income on the income statement. Reporting entities should present EPS for each class of common stock for all periods for which an income statement is presented.

Reporting entities with outstanding potential common stock should present diluted EPS for net income and income from continuing operations, if applicable, with equal prominence on the face of the income statement. If the reporting entity reports diluted EPS data in one period, it should report it for all periods presented, even if the amounts are the same as basic EPS. If basic and diluted EPS are the same amount for all periods, dual presentation can be accomplished in one line. If the reporting entity elects to present a single statement of comprehensive income, EPS should be presented after net income and before other comprehensive income (OCI). The presentation of basic and diluted EPS for a participating security, other than common stock, is not required but is not precluded.

In ASC 220-10-S99-5 (SAB Topic 6.B), the SEC staff requires that income or loss available to common stockholders be presented on the income statement when it is materially different from reported net income or loss. While ASC 220-10-S99-5 acknowledges that a materiality assessment consists of quantitative and qualitative factors, it highlights that for differences of less than 10%, the staff would generally not insist on disclosure on the income statement. See Figure FSP 7-3 for examples of adjustments which can create differences between net income and income available to common stockholders.

The terms "basic EPS" and "diluted EPS" are used in ASC 260 to identify EPS data to be presented. However, ASC 260-10-45-4 notes they are not required captions in the income statement; terms such as "earnings per common share" and "earnings per common share—assuming dilution," respectively, are acceptable alternatives.

A reporting entity that reports a discontinued operation should present basic and diluted EPS amounts for that line item either on the income statement or in the notes. However, if disclosure of these amounts in the notes is elected, basic and diluted EPS for continuing operations, and for net income, must still be presented on the income statement. ASC 260-10-55-49 illustrates the presentation of the captions on the income statement.

7.3.3.1 Other per-share performance measures

ASC 220-20-45-1 precludes disclosure of the EPS effects of individual events or transactions on the face of the income statement. Therefore, the EPS impact of restructurings, charges subject to ASC 420, Exit or Disposal Cost Obligations, impairments, or similar items, may not be presented on the face of the income statement. Reporting entities may disclose such EPS effects in the footnotes.

ASC 230-10-45-3 prohibits presentation of cash flow per share. Similarly, SEC FRP 202.04 notes that per share data other than that relating to net income, net assets, and dividends should be avoided in reporting financial results.

If the reporting entity chooses to report per-share amounts not required by ASC 260, such amounts should be computed in accordance with ASC 260 and presented only in the notes (i.e., not on the face of the financial statements) and labelled as pretax or net-of-tax.

7.3.4 Disclosure related to EPS

ASC 260-10-50-1 requires a reporting entity to disclose the following for each period for which an income statement is presented:

For basic and diluted EPS, a reconciliation of the numerator and denominator for income from continuing operations. The reconciliation should include the individual income and share amount effects of all securities that affect EPS. ASC 260-10-55-51 provides an example of this presentation.
The effect of preferred dividends on income available to common stockholders in computing basic EPS
Securities that were anti-dilutive for diluted EPS for the period(s) presented but which could potentially dilute EPS in the future (the concept of anti-dilution is addressed in FSP 7.5.1). Full disclosure of the key terms and conditions of these securities is required even if not included in diluted EPS in the current period. Generally, we believe disclosure of the terms and conditions of the securities should be detailed enough to allow the reader to gain insight to the potentially dilutive impact to basic EPS in the future.

A reporting entity should provide a description of any subsequent event that occurs after the end of the most recent balance sheet, but before issuance of the financial statements, that will materially change the number of common shares or potential common shares outstanding. Examples of those events may include:

the issuance or acquisition of common shares
the resolution of a contingency under a contingent stock agreement
the conversion or exercise of potential common shares outstanding at the end of the period into common shares

In certain SEC filings, there may be requirements to provide pro forma EPS for these and other events, as discussed in FSP 7.7.

If changes in common stock resulting from stock dividends or stock splits occur after the close of the period, but before the financial statements are issued, the computations of basic and diluted EPS shall be adjusted retroactively for all periods presented to reflect that change in capital structure. If per-share computations reflect such changes, that fact should be disclosed. In certain circumstances, pro forma EPS may be required as further discussed in FSP 7.6.1.

ASC 505, Equity, requires reporting entities to disclose participation rights on its outstanding securities (see ASC 505-10-50-3). After adoption of ASU 2020-06, in order to comply with the general disclosure requirements in ASC 505-10-50-3, an entity shall explain the pertinent rights and privileges of each outstanding instrument in accordance with ASC 505-10-50-13. See FSP 7.4.2 for details.

New guidance

In October 2023, the FASB issued ASU 2023-06, Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative, which added a requirement to disclose the methods used in the diluted EPS computation for each type of dilutive instrument (i.e., treasury stock method, if-converted method, two-class method, or reverse treasury stock method).

For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for this amendment will be the date on which the SEC’s removal of this disclosure from Regulation S-X becomes effective, with early adoption prohibited.
For all other entities, the amendment will be effective two years later.
For all entities, if by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X, the pending content of the related amendment will be removed from the Codification and will not be effective for any entity.

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