This free, guided checker walks your finance team through the key decision points for ASC 260 Basic and Diluted Earnings per Share. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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ASC 260 applies to entities whose common stock or potential common stock trades in a public market and to entities that have filed for a public offering. Nonpublic entities are not required to present EPS, but any per-share amount they do present must follow ASC 260 in full. The common trap is overlooking potential common stock, such as publicly traded convertible debt, when the common shares themselves are closely held.
EPS presentation is not required for a nonpublic entity that presents no per-share amounts (ASC 260-10-15-2 through 15-3).
Official guidance: FASB Accounting Standards Codification
A participating security participates in undistributed earnings with common stock, whether or not it is convertible into common stock. ASC 260-10-45-61A treats unvested share-based payment awards with nonforfeitable rights to dividends as participating securities, a frequent omission in practice. When participating securities exist, the two-class method applies to basic EPS and must also be evaluated for diluted EPS.
Apply the two-class method of computing EPS for the participating securities or additional class of common stock (ASC 260-10-45-60 through 45-70).
Official guidance: FASB Accounting Standards Codification
Entities with simple capital structures present only basic per-share amounts; all other entities present basic and diluted EPS with equal prominence on the face of the income statement (ASC 260-10-45-2 through 45-3). Sweep the debt agreements, equity compensation plans, and acquisition documents for conversion features, warrants, and earnout or escrow share arrangements before concluding the structure is simple.
A simple capital structure requires presentation of basic EPS only (ASC 260-10-45-2 through 45-3).
Official guidance: FASB Accounting Standards Codification
ASC 260-10-45-18 designates income from continuing operations available to common stockholders as the control number for determining whether potential common shares are dilutive or antidilutive. When the control number is a loss, including potential common shares reduces the loss per share, an antidilutive result, so diluted EPS equals basic EPS for every per-share caption even if total net income is positive.
With a loss from continuing operations as the control number, all potential common shares are antidilutive and are excluded from diluted EPS (ASC 260-10-45-17 through 45-18).
Official guidance: FASB Accounting Standards Codification
Each method applies to a different instrument family: the treasury stock method to options and warrants, the if-converted method to convertible securities, and the contingently issuable share guidance to shares that depend on future conditions. Run this evaluation separately for each series outstanding during the period; one pass through this checker addresses the series selected here. For contracts settleable in cash or shares, settlement in common stock is presumed regardless of stated intent or past practice.
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Official guidance: FASB Accounting Standards Codification
Under the treasury stock method, exercise is assumed at the beginning of the period (or the issuance date, if later) and the assumed proceeds are used to repurchase common stock at the average market price for the period; only the incremental shares enter the denominator (ASC 260-10-45-23). For share-based payment awards, assumed proceeds also include average unrecognized compensation cost (ASC 260-10-45-29). Options and warrants are dilutive only when the average market price exceeds the exercise price (ASC 260-10-45-25).
Out-of-the-money options and warrants are antidilutive and are excluded from the diluted EPS computation (ASC 260-10-45-25).
Official guidance: FASB Accounting Standards Codification
Under the if-converted method, dividends on convertible preferred stock and after-tax interest (including nondiscretionary adjustments such as profit-sharing effects) on convertible debt are added back to the numerator, and conversion is assumed as of the beginning of the period or the issuance date, if later (ASC 260-10-45-40 through 45-41). Test each series by comparing its incremental per-share effect with basic EPS from continuing operations; a security is antidilutive when its incremental effect is higher.
A convertible security whose incremental per-share effect exceeds basic EPS is antidilutive and is excluded from diluted EPS (ASC 260-10-45-40 and 45-17).
Official guidance: FASB Accounting Standards Codification
Contingently issuable shares are included in diluted EPS as if they were outstanding when all necessary conditions have been satisfied (ASC 260-10-45-48). Once all conditions are met, the shares also enter basic EPS from the date the conditions were satisfied (ASC 260-10-45-13). Read the contingency terms closely: a condition that lapses merely with the passage of time is not a substantive contingency, and such shares belong in the computations sooner.
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Official guidance: FASB Accounting Standards Codification
When the conditions are not yet fully satisfied, the number of contingently issuable shares included in diluted EPS is the number that would be issuable if the end of the reporting period were the end of the contingency period (ASC 260-10-45-48). For earnings-based contingencies, use earnings to date; for market-price contingencies, use the market price at the end of the reporting period; do not project future earnings or price levels (ASC 260-10-45-51 through 45-52).
No contingent shares are included because none would be issuable if the end of the reporting period were the end of the contingency period (ASC 260-10-45-48).
Official guidance: FASB Accounting Standards Codification
Each issue or series of potential common shares is considered separately and in sequence from the most dilutive to the least dilutive so the computation reflects maximum dilution; options and warrants generally rank first because they carry no numerator adjustment (ASC 260-10-45-18; illustrated at ASC 260-10-55-3). A series that is dilutive in isolation can become antidilutive once more dilutive series have been added, in which case it is excluded.
Present basic and diluted EPS, including each dilutive series under its applicable method and reflecting maximum dilution (ASC 260-10-45-2 through 45-3 and 45-18). All potential common shares are antidilutive after sequencing, so they are excluded and diluted EPS equals basic EPS (ASC 260-10-45-17 through 45-18).
Official guidance: FASB Accounting Standards Codification
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