Earnings Per Share (Portfolio 5137)

Bloomberg BNA Tax and Accounting Portfolio 5137-3rd, Earnings Per Share (Accounting Policy and Practice Series), discusses the calculation, presentation and disclosure requirements of Earnings Per Share under U.S. GAAP.

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Bloomberg BNA Tax and Accounting Portfolio 5137-3rd, Earnings Per Share (Accounting Policy and Practice Series), discusses the calculation, presentation and disclosure requirements of Earnings Per Share under U.S. GAAP. Interim reporting requirements and differences with International Financial Reporting Standards reporting requirements also are examined.
All entities that have issued publicly traded common stock or potential common stock, including options, warrants, convertible securities, or contingent stock agreements, must include Earnings Per Share information in their financial statements. In fact, entities must present this information even if they are only in process of filing with a regulatory agency in preparation for the sale of securities in a public market. If an entity that is not required to present Earnings Per Share chooses to do so, it must present the information in accordance with the provisions presented in this Portfolio.
Earnings Per Share is a performance measure. The manner in which an entity computes Earnings Per Share depends on whether the entity has outstanding any potentially dilutive securities (including options, warrants, convertible securities and contingent stock agreements). For entities with no potentially dilutive securities, the measure is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the relevant period. Entities that have issued potentially dilutive securities must present an EPS measure that includes the effects of these securities. Thus, the denominator is increased to include the additional shares that would have been outstanding if the dilutive potential common shares had been issued. When computing the dilutive effect of convertible securities, the numerator is adjusted to add back convertible preferred dividends and the after-tax amount of convertible debt interest for the period. Other adjustments also may be necessary; this Portfolio details the requirements.
This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio No. 5137-3rd, McEwen, Earnings Per Share (Accounting Policy and Practices Series).
Note: Various FASB documents, copyright by the Financial Accounting Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116, U.S.A., are reprinted with permission.


Ruth Ann McEwen, Ph.D., CPA

Ruth Ann McEwen, CPA; Ph.D., Industrial Management, with a concentration in Accounting, Georgia Institute of Technology; Masters, Industrial Management, Georgia Institute of Technology; and B.S., Alabama A&M University. Dr. McEwen serves as the Director, School of Accounting and Professor of Accounting at Florida International University. She has taught Financial Accounting at the Intermediate and Doctoral levels for more than 25 years.
Author and co-author of numerous articles dealing with ethics and the usefulness of accounting information to the investment community, Dr. McEwen has published in premier journals including The Accounting Review, Decision Sciences, Accounting Horizons, The CPA Journal, The International Journal of Accounting, and the Journal of Business Ethics. Dr. McEwen has presented practical applications of her research to numerous academic and practitioner groups. She also has presented to the FASB and the GASB a series of papers focusing on financial reporting and the usefulness of GAAP accounting information. Dr. McEwen also composed and assessed questions for the Uniform CPA Examination.
Serving as a consultant to the FASB, Dr. McEwen was deeply involved with its project to codify Generally Accepted Accounting Principles. A member of Beta Gamma Sigma and Beta Alpha Psi, she has received such honors as the 2001 Dean's Recognition Award for Research and the 2002 Graduate Student Association's Professor of the Year. She is licensed as a Certified Public Accountant in Georgia.

Table of Contents

Detailed Analysis

I. Historical Background and Objectives of the Portfolio

Introductory Material

A. Historical Background

1. Philosophical Debate

2. Initial Guidance

3. FASB Guidance

B. Objectives

II. Basis for Earnings Measurement

Introductory Material

A. Authoritative Basis for Earnings Per Share Disclosure

B. Objectives of Financial Reporting: The Decision Usefulness of Earnings

1. The Conceptual Framework of U.S. GAAP Reporting

2. Assumptions Underlying U.S. GAAP

III. The Statement of Earnings and Comprehensive Income

A. Comprehensive Income and Earnings Items

B. Earnings Per Share: Overview

1. Scope of Requirement

2. Categories of EPS

3. Variations in Nature and Extent of Disclosing EPS

4. Sources of Authoritative Guidance

5. Basic Earnings Per Share

6. Fully Diluted Earnings Per Share

7. Cross Reference

C. The Income Statement: Single and Multi-Step Formats

1. Perspective

2. Multi-Step Statements

3. Continuing Operations

4. Discontinued Operations

5. Extraordinary Items

IV. Calculation of Earnings Per Share (EPS)

Introductory Material

A. Weighted Average Shares Outstanding and Basic Earnings Per Share

B. Complex Capital Structure and Diluted Earnings Per Share

1. Potentially Dilutive Securities and Their Effect on Earnings Per Share

a. Potentially Dilutive Options, Warrants and Their Equivalents

i. Employee Options (Share-Based Payments)

ii. Warrants

b. Treasury-Stock Method: Treatment of Options and Warrants in Earnings Per Share Calculations

c. Potentially Dilutive Convertible Securities

i. Convertible Bonds

ii. Convertible Preferred Stock

d. The If-Converted Method: Treatment of Convertible Debt and Convertible Preferred Stock in Earnings Per Share Calculations

e. Anti-Dilution Sequencing

2. Annual and Quarterly Basic and Diluted EPS Calculations

a. Calculation of Annual Basic Earnings Per Share and Annual Diluted Earnings Per Share

b. Calculation of Quarterly Basic Earnings Per Share and Quarterly Diluted Earnings Per Share

C. Required Disclosures

D. Special Topics

1. Written Put Options

2. Accelerated Share Repurchase Programs

3. Contracts Settled in Stock or Cash

4. Contingently Issuable Securities

5. Contingently Convertible Securities

6. Stock Dividends and Stock Splits

7. Rights Issues

8. Prior Period Adjustments

9. Participating Securities and Two-Class Common Stock

10. Business Combinations

11. Securities of Subsidiaries

12. Partially Paid Stock Subscriptions

13. Employee Stock Ownership Plans

14. Financial Reporting by Entities in Reorganization Under the Bankruptcy Code

V. Interim Financial Reporting and its Effects on Earnings Per Share

Introductory Material

A. The Objective of Interim Reporting

B. Revenues and Expenses in Interim Reporting

C. Seasonality

D. Tax Provisions

E. Accounting Changes

F. Earnings and EPS

G. Required Disclosures for Interim Periods

VI. Alternate Earnings Per Share Definitions

Introductory Material

A. S& P Core Earnings

B. Pro Forma Earnings and the SEC's Regulation G

VII. International Aspects of Earnings Per Share: IAS 33 and International Convergence Efforts

A. Applicable Standards and Differences

B. Tentative Convergence Decisions

VIII. Earnings Quality and Topics in Earnings Management

Introductory Material

A. Motivations for Managed Earnings

1. Incentive Compensation

2. Draft Covenants

3. Income Reductions

4. Earnings Expectations

B. Broad Categories of Earnings Management Techniques

1. Big Bath Restructuring Charges

2. Creative Acquisition Accounting

a. Prior to FAS 141(R)

b. After FAS 141(R)

3. Miscellaneous "Cookie Jar" Reserves

4. Misuse of Materiality

5. Revenue Recognition

C. Other Earnings Management Techniques

1. Current Assets

a. Accounts Receivable

b. Notes Receivable

c. Inventory

2. Non-current Assets

a. Tangible Assets

b. Interest Capitalization

c. Depreciation

d. Basket Purchases

3. Asset Impairment

4. Investments in Securities

5. Equity Method of Accounting for Investments

6. Asset Retirement Obligations

7. Deferred Tax Assets

8. Intangible Assets

9. Current Liabilities

10. Loss Contingencies

11. Other Items

12. Off-Balance-Sheet Financing

13. Pension Obligations and Expenses

14. Derivatives

D. The Accounting Profession's and SEC's Responses to Earnings Management

Working Papers

Working Papers


Worksheet 1 Glossary

Worksheet 2 Statement of Financial Accounting Standards No. 128, Earnings Per Share February 1997

Worksheet 3 Accounting Principles Board Opinion No. 28 (As Amended)

Worksheet 4 International Accounting Standard 33, Earnings Per Share

Worksheet 5 Sample Disclosures of Earnings Per Share by Public Companies

Worksheet 6 List of Significant Accounting Pronouncements Principally Discussed






American Institute of Certified Public Accountants:

Statements on Auditing Standards

Accounting Principles Board Opinions

AICPA Audit and Accounting Guides

Accounting Research Bulletins

AICPA Statements of Position

Emerging Issues Task Force:

EITF Issues

Financial Accounting Standards Board:

FASB Concepts Statements

FASB Interpretations

FASB Staff Positions

FASB Statement of Financial Accounting Standards

FASB Miscellaneous

International Accounting Standards Board:

International Accounting Standards

Securities and Exchange Commission:

SEC Staff Accounting Bulletins

SEC Miscellaneous