Wiley GAAP: Practical Implementation Guide and Workbook

Chapter 23. EARNINGS PER SHARE (ASC 260)

BACKGROUND AND INTRODUCTION

Earnings per share (EPS) is an indicator widely used by both actual and prospective investors to gauge the profitability of a corporation. Its purpose is to indicate how effective an entity has been in using the resources provided by its common stockholders. In its simplest form, EPS is net income (loss) divided by the number of shares of outstanding common stock.

Any inconsistency of accounting policies between entities will result in a lack of comparability of the earnings per share figure. ASC 260 enhances financial reporting by ensuring that there is at least consistency in the calculation of the denominator in the earnings per share statistic.

ASC 260 applies to

• Entities whose common stock or potential common stock is publicly traded or that are in the process of issuing stock in the public markets.

• Entities that voluntarily choose to disclose.

DEFINITIONS OF KEY TERMS

(in accordance with IAS 33)

Antidilution. An increase in earnings per share or reduction in net loss per share resulting from the conversion, exercise, or contingent issuance of certain securities.

Basic earnings per share. The portion of net income available to each share of common stock outstanding during the reporting period.

Common stock. Stock that is subordinate to all other stock of the issuer.

Dilution. A reduction in earnings per share or an increase in net loss per share resulting from assuming that convertible securities have been converted ...