1. Earnings Per Share

2. EPS2 Importance of earnings per share information uHistorical performance of a corporation uPredictive value

3. EPS3 Objective of earnings per share information uPresent earnings per share possibilities uNo potential dilution uMaximum dilution uAntidilutive effect on earnings is not considered

4. EPS4 Two measures of earnings per share uBasic earnings per share –no potential dilution uDiluted earnings per share –maximum dilution

5. EPS5 Applicability of SFAS #128 uPublic companies –required to report uNon-public companies –optional

6. EPS6 Basic earnings per share model Basic EPS adjusted net income (ANI) weighted average number of shares outstanding during the period (S)  =

7. EPS7 Adjusted net income uNet income from continuing operations uReduced by preferred stock dividends which have been declared or are cumulative

8. EPS8 Weighted average number of common shares uStock splits/dividends during the period –require restatement of weighted average uStock splits/dividends subsequent to end of period but prior to issuance of financial statements –require restatement of weighted average uIncludes contingently issueable shares if the necessary conditions have been satisfied

9. EPS9 Diluted earnings per share model Diluted EPS adjusted net income (ANI) + income adjustment weighted average number of shares outstanding during the period (S) + share adjustment  =

10. EPS10 Call options and warrants u“Treasury stock method” uCapture potential dilution – Share Adjustment (SA) total shares obtainable upon exercise of security exercise proceeds average market price of shares =

11. EPS11 Call options and warrants computational guidelines uQuarterly averaging technique –if the reporting period is greater that 3 months, a quarterly averaging technique is employed uWhich exercise price –use the lowest exercise price

12. EPS12 Option computation Example: 12,000 options of which 4,000 were exercised at the beginning of quarter 3. Exercise price equals $20. SA: 3,091  3 quarters = 1,030 shares

13. EPS13 Stock-based compensation arrangements uConsidered the same as options uOutstanding at the grant date uIf dilutive, shares should be included in calculation of DEPS regardless of employees’ rights to the shares uProceeds consist of: ¬cash which must be paid at exercise ­unrecognized compensation cost ®the tax benefit on tax versus book difference

14. EPS14 Contingently issued shares uPassage of time uPassage of time along with other conditions uMaintenance of some level of earnings uAttainment of some level of earnings uChanges in market price of shares uOccurrence of events unrelated to earnings or market price Based on:

15. EPS15 Contingently issued shares: Conditions satisfied uTreatment in BEPS –include in the calculation of the weighted average number of shares outstanding as of the end of the period in which the condition was satisfied uTreatment in DEPS –include in the calculation of the weighted average number of shares outstanding as of the beginning of the period in which the condition was satisfied

16. EPS16 Contingently issued shares: Conditions not yet satisfied uTreatment in BEPS –exclude from the calculation uTreatment in DEPS –if the future conditions would be satisfied based on using the current existing conditions, include as before –otherwise, exclude from the calculation

17. EPS17 Convertible securities uTypes –convertible bonds –convertible preferred stock u“If Converted” method –what would happen to the income and number of shares used to calculate DEPS if the convertible security had been converted

18. EPS18 If converted method: Convertible bonds Example: –1,000 8% $100 bonds issued on 4/1/20X4 –issued at 102 –each bond convertible into 4 common shares –bonds mature in 10 years –the effective tax rate is 30% Calculate IA (income adjustment: net of tax effect on income assuming conversion) and SA (share adjustment).

19. EPS19 If converted method: Convertible bonds (con’t) Income adjustment: 1,000 bonds  (8%  $100) = 8,000annual cash interest 2,000 premium  10 years = 200premium amort 7,800effective interest exp  9/12(April 1 - Dec 31) .7(after-tax rate) $4,095income adjustment Share adjustment: 1,000 bonds convert to 4,000shares  9/12(April 1 - Dec 31) 3,000share adjustsment

20. EPS20 If converted method: Convertible preferred stock uDividends are a distribution of income, not a component of income –income adjustment does not require a tax effect uNo amortization of premium or discount

21. EPS21 Convertible securities: Special issues uVariable conversion rates –always use the conversion rate most favorable to the holder uEarnings per incremental share –evaluate the potential dilutive effect by considering securities in the order of increasing incremental impact (IA  SA)

22. EPS22 Presentation of EPS information uIn comparative financial statements, if DEPS is shown for one period, it should be shown for all periods uRequirements for interim are the same as annual requirements

23. EPS23 Presentation of EPS Information (con’t) uShare amounts for types of income other than from continuing operations (e.g., extraordinary item) –can be shown on the face or in the notes to the financial statements –these calculations use the same number of shares as does the calculation for EPS from continuing operations

24. EPS24 Special disclosure requirements uReconcile the numerator and denominator used to calculate BEPS to those used for DEPS uPreferred dividends effect in arriving at income available to common stockholders for the BEPS calculation uSecurities not included in DEPS, because their effect was antidilutive, which could effect BEPS in the future

25. EPS25 Disclosure of information about capital structure uAll entities are required to disclose a summary of the rights and privileges of various securities outstanding –for example: dividend and liquidation preferences, exercise prices for options and warrants, convertible rates for securities to common stock uEntities must disclose number of shares issued during the past fiscal year or any subsequent interim periods