Earnings per Share, ASC 260

SFAS 128, February 1997
“Earnings per Share”

1. Basic Earnings per Share
2. Diluted Earnings per Share

Basic EPS = (A) / (B)
(A) = income available for common stockholders
(B) = weighted-average number of common shares outstanding

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

1. convertible securities
2. options
3. warrants
4. contingent stock agreements

–> if the effect of potential common shares is
–> a “decrease” in EPS

–> if the effect of potential common shares is
–> an “increase” in EPS

–> add back (A2) and (A3) to income
(A2) dividends to convertible preferred shares
(A3) interest for convertible debt

–> 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

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

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 (1) and (2)
(1) number of shares issued due to assumed exercise of options and warrants
(2) number of shares assumed to be purchased back in the market using the proceeds of (1)

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

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 (3) and (4)
(3) number of shares assumed to be issued to raise enough proceeds
(4) number of shares assumed to be purchased back from the holders of put option

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 x100 = 40,000
Number of shares issued to raise40,000 –> 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

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

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

Options will be exercised only if MP < EP
If MP < EP, the effect of purchased put option is antidilutive

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