Cpa Review- Far 7-2 (Earnings Per Share)

Front 1

Earnings Per Share

Back 1

-Under GAAP and IFRS, all public entities are required to present earnings per share on the face of the I/S. The capital structure of the entity determines the manner in which it is disclosed.
-An entity has a simple capital structure if it has only common stock outstanding.

Hint 1

-All others present basic and diluted per share amounts.
-If the entity reports a discontinued operation, or an extraordinary item (GAAP only), the entity presents basic and diluted (if applicable) per share amounts for those items either on the face of the I/S or in the notes to the F/S.

Front 2

Simple Capital Structure

Back 2

-An entity that issues only common stock, will present EPS for income from continuing operations and for net income on the face of the I/S.
1. Basic EPS = Income available to common shareholders (Net Income - Preferred Dividends) ÷ Weighted average number of common shares outstanding.

Hint 2

2. Income Available to Common Shareholders: determined by deducting (1) dividends declared in the period on non-cumulative preferred stock (regardless of whether paid or not) and (2) dividends accumulated in the period on cumulative preferred stock (regardless of whether they have been declared).

Front 3

WACSO

Back 3

-Weighted Number of Common Shares Outstanding: the mean (average) of shares outstanding and assumed to be outstanding for EPS calculations. Shares sold or reacquired during the period (including treasury stock) should be weighted for the portion of the period they were outstanding.

Hint 3

Shares outstanding at beg. of period + Shares sold during the period* - Shares reacquired during the period + Stock dividends and stock splits** + Reverse stock splits** = WACSO for the entire period.
*On a time weighted basis, **retroactively adjusted

Front 4

Stock Dividends & Stock Splits

Back 4

-Must be treated as though they occurred at the beginning of the period. The shares outstanding before the stock dividend or split must be restated for the portion of the period before the stock dividend or split.
-If prior periods are presented, effects of dividends and splits must be retroactively adjusted for those periods.

Hint 4

-If a stock dividend or split occurs after the end of the period but before F/S's are issued, those shares should enter into the shares outstanding for the EPS calculation for all periods presented.
-Reverse stock splits would retroactively reduce shares outstanding for all periods presented.
-Rules for Stock Issued in a Business Combination: if the acquisition method is used, the weighted average is measures from the date of the combination.

Front 5

Complex Capital Structure

Back 5

-Entity has this when it has securities that can potentially be converted to common stock and would therefore dilute (reduce) EPS. Both basic and diluted EPS must be presented.
-Objective of diluted EPS is to measure the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares outstanding during the period. Include:*

Hint 5

*Convertible securities, Warrants and other options, Contracts that may be settled in cash or stock, Contingent shares.
-Diluted EPS = (Income available to the common shareholder + Interest on dilutive securities) ÷ Weighted average number of common shares, assuming all dilutive securities are converted to common stock

Front 6

Dilution From Options, Warrants & Equivalents

Back 6

-Applied using the treasury stock method which assumes that the proceeds from the exercise of these items will be used by the company to repurchase treasury shares at the prevailing market price, resulting in an incremental increase in shares outstanding, but not the full amount of shares that are issued on exercise of the common stock equivalents.

Hint 6

1. Dilutive vs. Antidilutive: options and similar instruments are only dilutive when the average market price of the underlying C/S exceeds the exercise price of the options or warrants b/c it is unlikely that they would be exercised if the exercise price were higher than the market price. These options or warrants would be "out of the money" and antidilutive.
-Previously reported EPS should not be adjusted retroactively in the case of options or similar instruments to reflect subsequent changes in market prices of the C/S.

Front 7

Treasury Stock Method

Back 7

1. If the average market price of the stock is greater than the exercise price (called "in the money"), assume that the warrants or other options are exercised at the beginning of the period.
2. Also assume that the proceeds received (option or exercise price) are used to purchase common shares at the average market price during the period.
3. When the average market price is in the money, the proceeds (assumed to be) received will not be sufficient to buy back an (assumed) equal amount of shares.
4. This will always result in dilution.

Hint 7

5. The difference between the # of shares assumed issued to satisfy the options or warrants and the # of shares assumed to be purchased w/ the proceeds should be included in the # of shares (denominator) for diluted EPS.
6. Previously reported EPS data should not be retroactively adjusted for changes in market price.
-Number of Shares (Issued) - ((# of shares x Exercise price)* ÷ Average market price**) = Additional shares outstanding (add to WACSO)
*Cash received, ** # of shares repurchased.

Front 8

Dilution from Convertible Securities

Back 8

-"If-Converted" method should be used which assumes that the securities were converted to common stock at the beginning of the period (or at times of issue if later).
1. Convertible Bonds: Add to the numerator, the interest expense, net of tax, due to the assumed conversion of bonds to C/S. Add to the denominator, the # of common shares associated w/ the assumed conversion. If the convertible bonds were issued during the period, assume the stock was issued at that date for weighted average calculation.

Hint 8

2. Antidilution: use results of each assumed conversion only if it results in dilution. Don't include results of the assumed conversion if its antidilutive. Each issue will be considered separately in sequence from most to least dilutive, w/ options and warrants generally included first.
3. Convertible P/S: adjust the numerator (as preferred stock dividends don't affect net income). Add to the denominator the # of shares associated with the assumed conversion. Antidilution rules apply to convertible P/S.

Front 9

Dilution from Contracts Settled in Cash or Stock

Back 9

-If a contract may be settled in either stock or cash at the election of either the entity or the holder, the facts available each period determine whether it is reflected in the computation of EPS.

Hint 9

-It is presumed that the contract will be settled in C/S and the resulting shares included in diluted EPS if the effect is more dilutive.
-Under IFRS, contracts that may be settled in cash or stock are always presumed to be settled in common shares and included in diluted EPS.

Front 10

Dilution from Contingent Shares

Back 10

-Contingent shares (that are dilutive) are also included in the calculation of basic EPS if (and as of the date) all conditions for issuance are met. Conditions if dilutive:
1. If the necessary condtions have been satisfied by the end of the period, those shares are included in basic EPS as of the beginning of the period in which the conditions were satisfied.

Hint 10

2. If the necessary conditions haven't been satisfied by the end of the period, the # of contingently issuable shares included in diluted EPS is based on the # of shares that would be issuable, if any, if the end of the reporting period were the end of the contingency period.

Front 11

Disclosure

Back 11

-Cash flow per share should not be reported. Basic and diluted EPS for both income from continuing operations and net income and the effects of discontinued operations and extraordinary items.
1. Reconciliation of the numerators and denominators of the basic and diluted per-share computations from income fro continuing operations.

Hint 11

2. Effect given to preferred dividends in arriving at income available to common stockholders in computing basic EPS.
3. Securities that could potentially dilute basic EPS in the future that weren't included for the current period b/c they were antidilutive.
4. Description of any transaction that occurred after period end that would have materially affected the number of actual and/or potential common shares outstanding.