1. Share-based payments and earnings per share

2. Academic Resource Center Share-based payments and earnings per share Page 2 Typical coverage of US GAAP ► Share-based payments (SBP): ► Scope ► Stock compensation ► Measurement ► Cost allocation ► Employee stock purchase plans ► SBP to non-employees ► Earnings per share (EPS): ► Basic ► Diluted ► Presentation and disclosure

3. Academic Resource Center Share-based payments and earnings per share Page 3 Executive summary SBP: ► The accounting for SBP is fairly well converged at this point. While there are a number of detailed differences discussed below, the basics of accounting for SBP are the same under both IFRS and US GAAP. ► In the case of graded vesting, IFRS must recognize compensation expense by measuring each tranche separately. Under US GAAP, companies have the choice between this accelerated approach or the straight-line approach, which does not separate the tranches. EPS: ► The accounting and disclosure requirements for IFRS and US GAAP are substantially the same. Both require presentation of basic and diluted EPS on the face of the income statement. Both IFRS and US GAAP specify that diluted EPS shall include incremental shares in the calculations, including the effects of stock options and warrants using the treasury-stock method and the effects of contingently issuable shares using the if-converted method. ► For diluted EPS, incremental shares, using IFRS, are computed as if the entire year-to-date period was “the period.” There is no averaging of the current period (quarter) with each of the prior periods (quarters).

4. Academic Resource Center Share-based payments and earnings per share Page 4 Primary pronouncements US GAAP ► ASC 260, Earnings Per Share ► ASC 718, Compensation – Stock Compensation ► ASC 505-50, Equity-Based Payments to Non-Employees IFRS ► IFRS 2, Share-based Payments ► IAS 33, Earnings Per Share

5. Academic Resource Center Share-based payments and earnings per share Page 5 Progress on convergence SBP: ► No further convergence planned at this time. EPS: ► The FASB and the IASB are jointly working on a short-term convergence project to resolve the differences in the standards, with both Boards issuing exposure drafts in August 2008. In April 2009, the Boards decided to delay the EPS convergence project pending completion of other projects.

6. Academic Resource Center Share-based payments and earnings per share Page 6 SBP Scope Guidance applies to transactions with employees and non-employees and the accounting is applicable to all companies. Guidance applies to transactions whereby an entity: (1) acquires goods or services in exchange for issuing shares or share options or other equity instruments, or (2) incurs liabilities that are based, at least in part, on the price of its shares or that may require settlement in its shares. Similar IFRSUS GAAP

7. Academic Resource Center Share-based payments and earnings per share Page 7 SBP Stock compensation: measurement Requires a fair-value-based approach in accounting for share-based payment arrangements. The fair value of the shares to be measured is based on market price, if available, or is estimated using an option-pricing model. The intrinsic value can be used if the market value cannot be determined. Similar IFRSUS GAAP

8. Academic Resource Center Share-based payments and earnings per share Page 8 SBP Stock compensation: measurement IFRS ► If an entity modifies stock option vesting terms, then the entity must, at a minimum, recognize the original amount of the expense of the award under its original terms. ► If the fair value of the award at the modification date is less than the fair value at the grant date, then there is no reduction in cost. US GAAP ► The original grant-date fair value is no longer used to measure compensation cost under any circumstances. Rather, the fair value of the options at the modification date is used to measure the compensation expense. Entities that grant stock options or SBP, in many cases, decide to make modifications to the vesting terms for a variety of reasons, such as to maintain high employee morale or reward outstanding employees. This is especially true when it is improbable that the vesting conditions will be met and the entity wants to provide compensation to an employee. For this scenario:

9. Academic Resource Center Share-based payments and earnings per share Page 9 SBP Stock compensation: measurement IFRS ► Modification of terms (continued): ► However, if the fair value at the modification date is greater than the fair value of the award at the grant date, then the incremental fair value (the difference between the fair value at the original grant date and the fair value at the modification date) must be recognized at cost. US GAAP Entities that grant stock options or SBP, in many cases, decide to make modifications to the vesting terms for a variety of reasons, such as to maintain high employee morale or reward outstanding employees. This is especially true when it is improbable that the vesting conditions will be met and the entity wants to provide compensation to an employee. For this scenario:

10. Academic Resource Center Share-based payments and earnings per share Page 10 Example 1 – Bull’s Eye Inc. (BEI) granted 1,000 share options to certain sales employees on January 1, 2010. The share options vest at the end of three years (cliff vesting) but are conditional upon selling 150,000 dartboard units over the three-year service period. The grant-date fair value of each option is $15.00. No forfeitures are expected to occur, unless the sales target of 150,000 units is not met. BEI is expensing the cost of the options on a straight-line basis over the three-year period at $5,000 per year (1,000 options x $15 ÷ 3 = $5,000). On January 1, 2011, BEI’s management believes the original sales target of 150,000 units will not be met because only 30,000 dartboard units were sold in 2010, and there has been a general economic business decline. Management modifies the sales target to 100,000 units, which it believes is achievable. No other terms or conditions of the grant are modified. The fair value of each option at January 1, 2011, is $8.00. Modification of vesting terms that are improbable of achievement example ► How should BEI account for the compensation expense under US GAAP and IFRS in 2010, 2011 and 2012? Show the necessary journal entries.

11. Academic Resource Center Share-based payments and earnings per share Page 11 Example 1 solution: US GAAP: With the modification, there is a remeasurement of the fair value of the grant at the modification date, which leads to a fair value compensation cost of $8,000 (1,000 shares x $8.00 = $8,000) over the vesting period or $2,667 ($8,000 ÷ 3 = $2,667) per year. Since BEI already recognized $5,000 of compensation cost in 2010, the only costs to be recognized in 2011 and 2012 would be $1,500 ($8,000 - $5,000 = $3,000 ÷ 2 = $1,500), for a total recognized compensation cost of $8,000. IFRS: BEI must recognize, at a minimum, the original amount of the expense under the award, even if the modification reduces the fair value of the award. In this example, under IFRS, BEI would continue to recognize the original expense of $15,000 as $5,000 per year for each of the three years. Modification of vesting terms that are improbable of achievement example

12. Academic Resource Center Share-based payments and earnings per share Page 12 Modification of vesting terms that are improbable of achievement example US GAAPIFRS 2010 Compensation expense $5,000 Additional paid-in capital $5,000 Compensation expense $5,000 Additional paid-in capital $5,000 2011 Compensation expense $1,500 Additional paid-in capital $1,500 Compensation expense $5,000 Additional paid-in capital $5,000 2012 Compensation expense $1,500 Additional paid-in capital $1,500 Compensation expense $5,000 Additional paid-in capital $5,000 Total expense $8,000Total expense $15,000 Example 1 solution: (continued):

13. Academic Resource Center Share-based payments and earnings per share Page 13 SBP Stock compensation: cost allocation Compensation expense is recognized over the service period. The service period is assumed to be the vesting period, unless specified otherwise. In the case of cliff vesting (the entire award vests at the end of the vesting period), the expense is recognized using a straight-line approach. Similar IFRSUS GAAP

14. Academic Resource Center Share-based payments and earnings per share Page 14 SBP Stock compensation: allocation IFRS ► In the case of graded vesting, companies must recognize compensation expense on an accelerated basis. US GAAP ► In the case of graded vesting (portions of the award vest at different dates throughout the vesting period), for awards containing only service conditions, entities make an accounting policy election to recognize compensation expense either on a straight-line basis (the award is valued as a single award with an average expected life) or on an accelerated basis (each tranche is measured as a separate award with its own expected life).

15. Academic Resource Center Share-based payments and earnings per share Page 15 Example 2 On January 2, 2012, ABC’s Board of Directors approved granting 3,000 stock options to a select group of senior employees. The requisite service period is three years, with 33% of the options vesting each calendar year in 2012, 2013 and 2014 (graded vesting). An option-pricing model was used (Black-Scholes-Merton) to calculate fair value, which was determined to be $10 on the grant date. No forfeitures are assumed. Graded vesting of stock compensation expense example ► How should ABC account for the compensation expense under US GAAP (assuming the straight-line election has been made) and IFRS in 2012, 2013 and 2014? Show the necessary journal entries.

16. Academic Resource Center Share-based payments and earnings per share Page 16 Example 2 solution: US GAAP: ABC would recognize $30,000 of compensation expense calculated as 3,000 shares at $10 each multiplied by a 0% forfeiture rate. The expense each year would be as follows under the straight-line method ($30,000/3 years = $10,000 per year). Graded vesting of stock compensation expense example Year Compensation expense 2012$10,000 201310,000 2014 10,000 $30,000

17. Academic Resource Center Share-based payments and earnings per share Page 17 Example 2 solution (continued): IFRS: ABC would recognize the same total expense of $30,000 as under US GAAP. ABC would allocate the expense to three tranches equally since there are three vesting periods. Each tranche is then allocated equally over its vesting period as follows: Note that these amounts have been rounded for presentation purposes. The 2012 tranche is 100% expensed in 2012 since it is wholly vested at the end of year one. The 2013 tranche is 50% expensed in 2012 and 2013 since it vests in two years. The 2014 tranche is 33% expensed in 2012, 2013 and 2014 since it vests in three years. Graded vesting of stock compensation expense example Year Compensation expense200920102011 2012$10,000 $ – - 201310,0005,000 – - 2014 10,000 3,333 $30,000$18,333$8,333$3,333

18. Academic Resource Center Share-based payments and earnings per share Page 18 Graded vesting of stock compensation expense example US GAAPIFRS 2012 Compensation expense $10,000 Additional paid-in capital $10,000 Compensation expense $18,333 Additional paid-in capital $18,333 2013 Compensation expense $10,000 Additional paid-in capital $10,000 Compensation expense $8,333 Additional paid-in capital $8,333 2014 Compensation expense $10,000 Additional paid-in capital $10,000 Compensation expense $3,333 Additional paid-in capital $3,333 Total expense $30,000Total expense $30,000* * Rounded for presentation purposes. Example 2 solution (continued):

19. Academic Resource Center Share-based payments and earnings per share Page 19 SBP Employee stock purchase plans Addresses employee share purchase plans, which allow employees to purchase shares of an entity, at a discount, less than market price. Similar IFRSUS GAAP

20. Academic Resource Center Share-based payments and earnings per share Page 20 SBP Employee stock purchase plans IFRS ► All employee purchase plans are deemed to be compensatory, thus compensation expense is recorded for the amount of the discount. US GAAP ► If a plan is deemed to be non-compensatory, no compensation expense is recorded. A plan would be deemed non-compensatory if: ► The proceeds received by the employer are not less than the proceeds it would receive in an offering of shares through an underwriter (or the discount is consistent with that offered to all shareholders — 5% is generally accepted as the usual discount). ► Substantially all eligible employees may participate on an equitable basis. ► The plan does not include option features to allow employees to cancel their participation.

21. Academic Resource Center Share-based payments and earnings per share Page 21 Example 3 The Delicious Doughnuts Company (DDC) adopted an employee share purchase plan effective January 1, 2012. The plan provides all DDC employees who have worked for DDC more than 90 days, the right to purchase DDC common stock ($1 par value per share) at a 5% discount from the market price at the end of each payroll period, based on the average market price of the common stock during the same period. The plan does not allow cancellation of any purchase subsequent to the payroll period. During the first quarter of 2012, 4,500 employees elected to participate in the plan (75% of eligible employees) and purchased 45,000 shares of common stock at an average market price of $50 per share, with an average discount of $2.50 per share. Noncompensatory share purchase plans example ► How should DDC account for the compensation expense under US GAAP and IFRS during the first quarter of 2012? Show the necessary journal entries.

22. Academic Resource Center Share-based payments and earnings per share Page 22 Example 3 solution: US GAAP: As the plan is deemed non-compensatory, DDC does not record any compensation expense. Common stock: 45,000 shares x $47.50 ($50 - 2.50) = $2,137,500 Cash$2,137,500 Common stock$ 45,000 Additional paid-in capital 2,092,500 Noncompensatory share purchase plans example

23. Academic Resource Center Share-based payments and earnings per share Page 23 Example 3 solution (continued) IFRS: All employee purchase plans are deemed compensatory so DDC must record an expense for the amount of the discount for the shares issued, or $112,500 calculated as 45,000 shares x $2.50 discount per share. Common stock: 45,000 shares x $50 per share = $2,250,000 Cash$2,137,500 Compensation expense 112,500 Common stock$ 45,000 Additional paid-in capital 2,205,000 Noncompensatory share purchase plans example

24. Academic Resource Center Share-based payments and earnings per share Page 24 SBP SBP to nonemployees Share-based awards to non-employees should be measured and recognized using the fair value method. Similar IFRSUS GAAP

25. Academic Resource Center Share-based payments and earnings per share Page 25 SBP SBP to non-employees IFRS ► The fair value of the transaction should be based on the fair value of the goods or services received and only on the fair value of the equity instruments if the fair value of the goods or services cannot be reliably determined. ► If using the fair value of the equity instruments, the measurement date is based on a service model approach using the date the entity obtains the goods or as the counterparty renders the services. If the goods or services are received on a number of dates over a period, the fair value at each date should be used. There is no performance commitment concept under IFRS. US GAAP ► The share-based award should be valued at either the fair value of the goods or services received or the fair value of the equity instruments issued, whichever is more reliable. If the fair value of the equity instruments issued is used, then the fair value is measured at the earlier of: (a) The date at which a commitment for performance by the counterparty is reached. (b) The date at which the counterparty’s performance is complete (i.e., goods or services fully received).

26. Academic Resource Center Share-based payments and earnings per share Page 26 Example 4 – On January 15, 2012, the purchasing manager of a large computer manufacturer, Supercomputer (Super), obtained approval from management and the Board of Directors to enter into a contract with a manufacturing software supplier to issue 1,000 shares of Super’s common stock ($1.00 par value per share) for delivery of a newly completed software program to be used in Super’s manufacturing process. The fair market value of the common stock was $50 per share on January 15, 2012. The purchasing manager reached an agreement with the vendor on January 31, 2012, and a contract was signed that day. The fair market value of the common stock was $52 per share on January 31, 2012. The vendor agreed to deliver the completed software on February 28, 2012. Measurement basis for non-employees example ► Assuming the software is delivered on February 28, 2012, at which time the fair market value of the common stock was $48 per share, what amount would Super record for this purchase under US GAAP and IFRS? Show the necessary journal entries. The vendor has sold similar software to other manufacturers, sometimes for common stock and sometimes for cash, usually at a negotiated amount. The vendor believes the selling price of the software should be about $75,000, or around that range (which, for this example, is an unreliable estimate).

27. Academic Resource Center Share-based payments and earnings per share Page 27 Example 4 solution: US GAAP: Because the purchase price of the vendor’s software can vary, the fair market value of the manufacturing entity’s common stock would seem to be a better indicator of the value. Under US GAAP, according to ASC 505-50-30-11, the earlier of either the date at which a commitment for performance is reached or when the performance is complete is used. Therefore, the commitment date is used, which is January 31, 2012 (1,000 shares x $52 = $52,000). Purchased manufacturing software $52,000 Par value — common stock $ 1,000 Additional paid-in capital 51,000 Measurement basis for non-employees example

28. Academic Resource Center Share-based payments and earnings per share Page 28 Example 4 solution (continued): IFRS: The fair market value of the goods or services or the fair market value of the common stock is also used to determine fair value, whichever is more reliable. Again, in this situation, the fair market value of the common stock would appear to be a better measure of fair value. However, under IFRS, the transaction is recorded when the entity obtains the software, which is February 28, 2012, and the fair value of the software at that time is determined to be $48,000 (1,000 shares x $48 = $48,000). Purchased manufacturing software $48,000 Par value – common stock $ 1,000 Additional paid-in capital 47,000 If the vendor’s estimate was reliable and thus the measure of fair value, the basis of the software would be $75,000 and Super would prepare the following journal entry using either US GAAP or IFRS: Purchased manufacturing software $75,000 Par value – common stock $ 1,000 Additional paid-in capital 74,000 Measurement basis for non-employees example

29. Academic Resource Center Share-based payments and earnings per share Page 29 EPS Basic Requires the disclosure of basic EPS in the statement of income. Similar, although there are a few detailed application differences in the arithmetical model used to calculate the weighted-average shares outstanding. IFRSUS GAAP

30. Academic Resource Center Share-based payments and earnings per share Page 30 EPS Diluted Requires the disclosure of diluted EPS in the statement of income. Diluted EPS includes incremental shares in the calculations, including the effects of stock options and warrants using the treasury-stock method and the effects of contingently issuable shares using the if-converted method. Similar, although there are a few detailed application differences in the arithmetical model used to calculate the weighted-average shares outstanding. IFRSUS GAAP

31. Academic Resource Center Share-based payments and earnings per share Page 31 EPS Diluted IFRS ► Always assumes that contracts that may be settled in cash or shares will be settled in shares. Thus, these types of contracts will always impact the computation of diluted EPS. US GAAP ► Presumes that contracts that may be settled in cash or shares will be settled in shares unless evidence is provided to the contrary. ► Such evidence might include a past history of cash settlements of similar instruments or an explicit requirement that the settlement is made in cash. ► These contracts typically impact the computation of diluted EPS, but could be excluded from the computation of diluted EPS if evidence is provided that the settlement will be made in cash.

32. Academic Resource Center Share-based payments and earnings per share Page 32 Example 5 An entity issues 1,000 convertible bonds on January 1, 2012. The bonds have a five-year term, are issued at a $1,000 face value at 5% interest per year and are convertible into 100 shares of stock for each $1,000 bond at any time through December 31, 2016. The entity has the option to settle the principal amount of the bonds for either 100 shares for each bond or the equivalent cash amount. The entity has no evidence that the contracts will be settled in cash. During 2012, the entity earned $20.0 million and had 1.0 million common shares outstanding. There is no tax rate and no tax effect is considered in the adjustment to net income for the interest on the bonds. Contracts that may be settled in cash or shares example ► Calculate the basic and diluted EPS in 2012 under US GAAP and IFRS. ► Assume that management has evidence that the convertible debt will be settled for cash due to its past history of cash settlements and intent to settle in cash. How would this assumption affect the calculation of diluted EPS under US GAAP and IFRS?

33. Academic Resource Center Share-based payments and earnings per share Page 33 Example 5 solution: Basic EPS The calculation for basic EPS is the same for US GAAP and IFRS. Net income $20,000,000 Common shares outstanding 1,000,000 Contracts that may be settled in cash or shares example = $20

34. Academic Resource Center Share-based payments and earnings per share Page 34 Example 5 solution (continued): Diluted EPS Under US GAAP, the convertible debt is presumed to be settled in shares since there is no evidence to the contrary. IFRS always assumes that the convertible debt would be settled in shares; therefore, the calculation is the same. Net income$20,000,000 Add interest on bonds (1,000 convertible bonds x $1,000 = $1,000,000 x 5% interest = $50,000) 50,000 Adjusted net income$20,050,000 Common shares outstanding 1,000,000 Add assumed conversion of bonds ($1,000,000/1,000 x 100 = 100,000 shares) 100,000 Adjusted shares outstanding 1,100,000 Adjusted net income$20,050,000 Adjusted shares outstanding 1,100,000 = $18.23 Contracts that may be settled in cash or shares example

35. Academic Resource Center Share-based payments and earnings per share Page 35 Example 5 solution (continued): Cash settlement With the evidence that management has provided regarding its cash settlement history and intentions to settle in cash, for US GAAP, there would be no consideration of the dilutive effect of the bonds on the diluted EPS calculation, resulting in a diluted EPS of $20 as calculated above under basic EPS. Under IFRS, this evidence would not be considered and share settlement would be presumed, resulting in the diluted EPS of $18.23 as calculated above. Contracts that may be settled in cash or shares example

36. Academic Resource Center Share-based payments and earnings per share Page 36 EPS Diluted – calculation of weighted shares outstanding IFRS ► The number of incremental shares is computed as if the entire year-to-date period was “the period” (that is, there is no averaging of the current period with each of the other periods). US GAAP ► The number of incremental shares (attributable to options, warrants and contingently issuable shares) is computed using a year-to-date weighted average of the number of incremental shares included in each quarterly calculation.

37. Academic Resource Center Share-based payments and earnings per share Page 37 Example 6 Investors Incorporated (Investors) earned $5.0 million per quarter during the current year, for total net income for the year of $20.0 million. The common shares outstanding remained at 2.0 million shares throughout the year. Investors had 400,000 stock options outstanding during the entire year at an exercise price of $25 per option. No options were exercised during the year. There were no incremental shares calculated during the first and second quarters as the market price of the common stock was below the grant or exercise price. However, Calculation of weighted shares outstanding example ► Calculate the basic and diluted EPS for Investors for each quarter, and annually, in the current year under US GAAP and IFRS. during the third and fourth quarters, the market price of the stock rose above the grant-date price, thus incremental shares were calculated for these two quarters. The third-quarter average market price was $50 per share and the fourth-quarter average market price was $52.63 per share. The average market price for the year was $34.48 per share.

38. Academic Resource Center Share-based payments and earnings per share Page 38 Example 6 solution: US GAAP: As shown in the calculation below, Investors determined the quarterly incremental shares using the average for the quarter; however, the annual incremental shares are determined using the average of the quarterly incremental shares. * Calculated as net income divided by common shares. ** Calculated as net income divided by dilutive shares. Calculation of weighted shares outstanding example Q1Q2Q3Q4Year to date Net income$5,000,000 $5,000,000 1 $20,000,000 1 Common shares2,000,000 2,000,000 1 Incremental shares (1) -- 200,000 (2) 210,000 (3) 102,500 (4) Dilutive shares2,000,000 2,200,000 12,210,000 12,102,500 1 Basic EPS *$2.50 $10.00 1 Diluted EPS **$2.50 $2.27$2.26$9.51 (5)

39. Academic Resource Center Share-based payments and earnings per share Page 39 Example 6 solution (continued): (1) Incremental shares attributable to the price of common stock exceeding the exercise price of common stock options, based on the average price of common stock for the quarter. (2) Third-quarter calculation of incremental shares: Calculation of weighted shares outstanding example Stock options400,000 Exercise price$25.00 Proceeds to company$10,000,000 Average market price of stock for third quarter$50.00 Shares assumed repurchased200,000 Incremental shares (400,000 - 200,000 = 200,000)200,000

40. Academic Resource Center Share-based payments and earnings per share Page 40 Example 6 solution (continued): (3) Fourth-quarter calculation of incremental shares: (4) Summation of incremental shares for the quarters divided by four. (5) Does not equal the sum of the quarters due to the effect of average incremental shares for the year. Calculation of weighted shares outstanding example Stock options400,000 Exercise price$25.00 Proceeds to company$10,000,000 Average market price of stock for fourth quarter$52.63 Shares assumed repurchased190,000 Incremental shares (400,000 - 190,000 = 210,000)210,000

41. Academic Resource Center Share-based payments and earnings per share Page 41 Example 6 solution (continued): IFRS: As shown in the calculation below, Investors determined the quarterly incremental shares in the same manner as US GAAP using the average for each quarter; however, the annual incremental shares are determined using the average for the year. This results in a diluted EPS that is slightly lower ($.03) than US GAAP. * Calculated as net income divided by common shares. ** Calculated as net income divided by dilutive shares. Calculation of weighted shares outstanding example Q1Q2Q3Q4Year to date Net income$5,000,000 $5,000,000 1 $20,000,000 1 Common shares2,000,000 2,000,000 1 Incremental shares 1) -- 200,000 (2) 210,000 (2) 110,000 (3) Dilutive shares2,000,000 2,200,000 12,210,000 12,110,000 1 Basic EPS *$2.50 $2.50 1$10.00 1 Dilutes EPS **$2.50 $2.27$2.26 1$9.48 (4)

42. Academic Resource Center Share-based payments and earnings per share Page 42 Example 6 solution (continued): (1) Incremental shares attributable to the price of common stock exceeding the exercise price of common stock options, based on the average price of common stock for that period. (2) This calculation is the same as US GAAP as the period is one quarter. (3) Calculation of annual incremental shares using the period of one year: (4) Does not equal the sum of the quarters due to the effect of the average incremental shares for the year. Calculation of weighted shares outstanding example Stock options400,000 Exercise price$25.00 Proceeds to company$10,000,000 Average market price of stock for the year$34.48 Shares assumed repurchased290,000 Incremental shares (400,000 - 290,000 = 110,000)110,000

43. Academic Resource Center Share-based payments and earnings per share Page 43 EPS Diluted – contingently issuable shares IFRS ► Potentially issuable shares are considered “contingently issuable” and are included in diluted EPS using the if-converted method only if the contingencies are satisfied at the end of the reporting period. US GAAP ► Potentially issuable shares are included in diluted EPS using the if-converted method if one or more contingencies exist that relate to the entity’s share price.

44. Academic Resource Center Share-based payments and earnings per share Page 44 Example 7 The EPS Company (EPS) has issued 5% convertible bonds for $1.0 million, which may be converted into 10,000 shares of common stock if the per-share price of the common stock reaches $40 per share. During the year, EPS earned $20.0 million after taxes and had 2.0 million shares of common stock outstanding, of which the average market price for the common stock was $30 per share. At no time during the year did the market price of the common stock exceed $35. EPS’ tax rate is 40%. Contingently issuable shares example ► Calculate the diluted earnings per share for EPS for the year under US GAAP and IFRS.

45. Academic Resource Center Share-based payments and earnings per share Page 45 Example 7 solution: US GAAP: The diluted EPS calculation would include the incremental shares attributable to the bond even if the common price was not met. Contingently issuable shares example Net income$20,000,000 Add interest on bonds less taxes ($1,000,000 x 5% interest x 60% = $30,000) 30,000 Adjusted net income $20,030,000 Common shares outstanding2,000,000 Add assumed conversion of bonds10,000 Adjusted shares outstanding2,010,000 Adjusted net income$20,030,000 Adjusted shares outstanding 2,010,000 = $9.97

46. Academic Resource Center Share-based payments and earnings per share Page 46 Example 7 solution (continued): IFRS: The diluted EPS calculation would not consider the contingently issuable shares as the contingency that gives rise to the conversion feature has not been met. Therefore, the diluted EPS is the same as the basic EPS or $10 calculated as $20.0 million of net income divided by the 2.0 million shares outstanding. Contingently issuable shares example

47. Academic Resource Center Share-based payments and earnings per share Page 47 Presentation and disclosure SBP Has extensive disclosure requirements related to share compensation plans, including measurement and recognition criteria. The pronouncements contain basic requirements to disclose the: ► Type and scope of arrangements existing during the period. ► Description of the agreements (settlement methods, vesting conditions, etc.). ► Number and average exercise price of share options by category, including: ► Options outstanding at the beginning of the period. ► Options outstanding at the end of the period. ► Options granted, vested, exercised and forfeited during the period. ► Options exercisable at the end of period. Similar, although the pronouncements are less detailed than those under US GAAP. IFRSUS GAAP

48. Academic Resource Center Share-based payments and earnings per share Page 48 Presentation and disclosure SBP Basic requirements (continued): ► Average share price of exercised options. ► Range of exercise prices and remaining contractual life of options outstanding at the balance sheet date. ► Method of calculating the fair value of the transactions. ► Valuation methods (model and input values, etc.) and their impact on the statement of income and the financial position of SBP transactions (expense and carrying amount of debts, etc.). Similar, although the pronouncements are less detailed than those under US GAAP. IFRSUS GAAP

49. Academic Resource Center Share-based payments and earnings per share Page 49 Presentation and disclosure SBP IFRS ► Has less detailed and less specific disclosures. US GAAP ► Although the disclosures are similar, US GAAP has more detailed and specific disclosures.

50. Academic Resource Center Share-based payments and earnings per share Page 50 Presentation and disclosure EPS EPS and basic and diluted EPS computations must be presented on the face of the statement of income each year. The following must be disclosed: ► How the basic and diluted calculations were determined, including the: ► Weighted-average shares outstanding ► Incremental shares ► Amount of net income or loss (as adjusted) ► Basic and diluted EPS for discontinued operations Similar IFRSUS GAAP

51. Academic Resource Center Share-based payments and earnings per share Page 51 Presentation and disclosure EPS IFRS ► Extraordinary items are not permitted. ► Allows adjusted basic and diluted EPS based on alternative earnings measures to be disclosed in the financial statements. US GAAP ► Basic and diluted EPS must be disclosed for extraordinary items. ► Does not allow EPS based on alternative earnings measures to be disclosed in the financial statements.

52. Academic Resource Center Share-based payments and earnings per share Page 52 Ernst & Young LLP Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global and of Ernst & Young Americas operating in the US. © 2012 Ernst & Young Foundation (US). All Rights Reserved. All Rights Reserved. SCORE No. MM4115C.