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1、Dilutive Securities and Earnings Per ShareChapter 11Intermediate Accounting14th EditionKieso, Weygandt, and Warfield Prepared by Coby Harmon, University of California, Santa BarbaraDescribe the accounting for the issuance, conversion, and retirement of convertible securities.Explain the accounting f

2、or convertible preferred stock.Contrast the accounting for stock warrants and for stock warrants issued with other securities.Describe the accounting for stock compensation plans under generally accepted accounting principles.Discuss the controversy involving stock compensation plans.Compute earning

3、s per share in a simple capital structure.Compute earnings per share in a complex capital structure.Learning Objectives An earnings measurement that is based on the return on a per share basis rather than the total earnings of a company.Significance of Earnings Per Share (EPS)Market Price of StockEP

4、SPrice Earnings RatioUnconditional conversions and exercises- Commitments that allow unrestricted increases in outstanding common shares to occur at any timeConditional conversions and exercises- Commitments that allow increases in outstanding common shares at some future date if certain conditions

5、are metDilution of EPSComplex Capital Structure(dual EPS)Capital Structure (including convertible debt)Simple Capital Structure(basic EPS)Capital Structure (including convertible debt) e divided by average number of common shares outstanding e minus nonconvertible preferred stock dividend claims div

6、ided by average number of common shares outstandingSimple Capital Structure(basic EPS)In a simple capital structure, stockholders equity consists of:Common stock or Common stock and nonconvertible preferred stockCapital Structure (including convertible debt)Complex Capital Structure(dual EPS)Dilutio

7、n/Antidilution TestEquity contractsConvertible securitiesUse treasury stock methodUse if-converted methodContingently issuable sharesPotentially dilutive securities:Convertible preferred stockConvertible bondsContingent common stock issuesStock rightsStock optionsEPS applies only to common stock.Cal

8、culated as:Net e (after tax) - Preferred dividends*Weighted average outstanding common stock * Current periods cumulative preferred stock dividends (whether or not declared) and noncumulative preferred stock dividends (only if declared) are subtracted because these represent the preferred stocks cla

9、im to the current earnings.EPS Calculation A company had 200,000 shares of $50 par value common stock, 10,000 of 5%, $20 par value cumulative preferred stock, and 30,000 shares of 5%, $10 par value noncumulative preferred stock outstanding during the year. Net e after taxes was $1,500,000. No divide

10、nds were declared during the year. EPS would be a. $7.50 b. $7.43 c. $7.45 d. $7.38EPSQuestion A company had 200,000 shares of $50 par value common stock, 10,000 of 5%, $20 par value cumulative preferred stock, and 30,000 shares of 5%, $10 par value noncumulative preferred stock outstanding during t

11、he year. Net e after taxes was $1,500,000. No dividends were declared during the year. EPS would be a. $7.50 b. $7.43 c. $7.45 d. $7.38$1,500,000 - (10,000 5% $20 par)200,000 sharesSince dividends were not declared, only the cumulative preferred stock dividends are subtracted.EPSQuestionBasic calcul

12、ation (review):Net e (after tax) - Preferred dividends*Weighted average outstanding common stock* Current periods cumulative preferred stock dividends (whether or not declared) and noncumulative preferred stock dividends (only if declared)Computing EPS Simple Capital StructureBasic calculation (revi

13、ew):Net e (after tax) - Preferred dividends*Weighted average outstanding common stock* Current periods cumulative preferred stock dividends (whether or not declared) and noncumulative preferred stock dividends (only if declared) Number of shares outstanding Number of months outstanding/12 Weighted a

14、verage shares outstandingComputing EPS Simple Capital Structure Months Shares Shares Fraction of Year Equivalent Are Outstanding Outstanding Outstanding Whole UnitsJanuary-February12,000 x2/12=2,000March-June14,700 x4/12=4,900July-November18,000 x5/12=7,500December17,520 x1/12= 1,46015,860Total weig

15、hted average common sharesMcTeal Corporation had 12,000 shares of common stock outstanding at the beginning of the year. On March 2, it issued 2,700 shares; on July 3, it issued another 3,300 shares, and on December 1, it reacquired 480 shares as treasury stock. The nearest whole month is usedWeight

16、ed Average Shares Common shares issued as part of stock dividends and stock splits are treated retroactively as subdivisions of the shares already outstanding at the date of the split or dividend.Computing EPS Simple Capital StructureRetroactive treatment:If new shares were not issued in the period,

17、 the stock dividend or split is treated as outstanding from the beginning of the period.If new shares were issued in the period, the stock dividend or split is applied retroactively in proportion to the number of shares outstanding at the time of the dividend or split.Computing EPS Simple Capital St

18、ructureWallers corporation begins operations in January 2007, and issues 5,000 shares of common stock that are outstanding all during 2007. On December 31, 2007, it issues a 2-for-1 stock split. Months Shares Shares Fraction of Year Equivalent Are Outstanding Outstanding Outstanding Whole UnitsJanua

19、ry-December5,000 x12/12=5,000Total weighted average common shares 10,000The two-for-one split is retroactive to January 1 + 5,000ContinuedWeighted Average SharesOn May 29, 2008, R Corporation issues 5,000 shares of common stock; on August 3, it issues a 20% stock dividend; and on October 5, it issue

20、s 2,000 shares of stock. Months Shares Shares Fraction of Year Equivalent Are Outstanding Outstanding Outstanding Whole UnitsJanuary-December5,000 x12/12=5,0002007 Data on 2008 Statement5,000 x 200% x 120% = 12,000 equivalent whole unitsContinuedWeighted Average Shares2008 Data on 2008 Statement Mon

21、ths Shares Shares Fraction of Year Equivalent Are Outstanding Outstanding Outstanding Whole UnitsJanuary-May10,000June-July15,000August-September18,000Issued 5,000 sharesIssued 20% stock dividendWeighted Average Shares2008 Data on 2008 Statement Months Shares Shares Fraction of Year Equivalent Are O

22、utstanding Outstanding Outstanding Whole UnitsJanuary-May10,000June-July15,000August-September18,000 Increases 20%12,000 Increases 20%18,000October-December20,000Weighted Average Shares2008 Data on 2008 Statement Months Shares Shares Fraction of Year Equivalent Are Outstanding Outstanding Outstandin

23、g Whole UnitsJanuary-May12,000 x5/12=5,000June-July18,000 x2/12=3,000August-September18,000 x2/12=3,000October-December20,000 x3/12= 5,00016,000Weighted Average Shares Compute the weighted average number of shares of common stock outstanding.Weighted Average Shares Compute the weighted average numbe

24、r of shares of common stock outstanding.Weighted Average SharesContingent shares are issuable in the future for little or no cash consideration upon the satisfaction of certain conditions.Contingent shares are considered outstanding common shares and are included in basic EPS as of the date that all

25、 necessary conditions have been satisfied.Contingent Shares Dual presentation of EPS requires two computations:Basic EPS (EPS)Diluted EPS (DEPS)Computing EPSComplex Capital StructureBased on outstanding common shares plus dilutive potential common stock.Reflects the maximum dilution of EPS that woul

26、d occur if conversion or exercise of all dilutive securities took place at the beginning of the period (or issuance date if later)A security is dilutive if DEPS is decreased as a result of incorporating into DEPS the common shares from the assumed conversion or exercise of the potential common stock

27、.Complex Capital StructureDEPSBased on outstanding common shares plus dilutive potential common stock.Reflects the maximum dilution of EPS that would occur if conversion or exercise of all dilutive securities took place at the beginning of the period (or issuance date if later)A security is antidilu

28、tive if DEPS is increased as a result of incorporating into DEPS the common shares from the assumed conversion or exercise of the potential common stock.Complex Capital StructureDEPSBased on outstanding common shares plus dilutive potential common stock.Reflects the maximum dilution of EPS that woul

29、d occur if conversion or exercise of all dilutive securities took place at the beginning of the period (or issuance date if later).Complex Capital StructureDEPSBased on outstanding common shares plus dilutive potential common stock.Reflects the maximum dilution of EPS that would occur if conversion

30、or exercise of all dilutive securities took place at the beginning of the period (or issuance date if later)The test to determine whether a security is dilutive or antidilutive is based on the change in DEPS for e from continuing operations.Complex Capital StructureDEPSDetermine the number of potent

31、ially issuable shares.Test to determine dilution.Calculate DEPS.Computing DEPSDetermine the number of potentially issuable shares.Test to determine dilution.Calculate DEPS.Potentially Issuable SharesEquity contracts (stock rights, warrants, and options)Convertible securities (preferred stock and deb

32、t)Contingently issuable sharesComputing DEPSUse the treasury stock method to incorporate equity contracts into DEPS.This method assumes that proceeds from the exercise of equity contracts are used to purchase treasury shares.- The net increase in shares is included in denominator of DEPS.Equity Cont

33、ractsTreasury Stock MethodDetermine new shares from assumed exercise of equity contract.Compute shares purchased for the treasury. Compute the incremental shares assumed outstanding.Equity ContractsTreasury Stock MethodDetermine new shares from assumed exercise of equity contract.Compute shares purc

34、hased for the treasury. Compute the incremental shares assumed outstanding.Proceeds from assumed exerciseAverage market price of stockEquity ContractsTreasury Stock MethodDetermine new shares from assumed exercise of equity contract.Compute shares purchased for the treasury. Compute the incremental

35、shares assumed outstanding. New shares from assumed exercise (1)- Treasury shares assumed purchased (2) Net increase in shares outstanding (3)Equity ContractsTreasury Stock MethodWhen the exercise price equals or exceeds the market price, the options are antidilutive and are not assumed to be exerci

36、sed.Equity ContractsTreasury Stock MethodDEPS options also include stock-based compensation awards.All such stocks are considered outstanding as of the grant date when computing DEPS.The shares included in DEPS should be weighted to reflect only the portion of the period the award was outstanding.Eq

37、uity ContractsTreasury Stock Method Common stock outstanding was 100,000 shares. Options to purchase 5,000 shares of common stock are outstanding at the beginning of the year. The options can be exercised to purchase stock at $50 per share. The average market price of the stock was $80. The net incr

38、ease in the DEPS denominator is: a. 25,000 shares b. 5,000 shares c. 3,125 shares d. 1,875 sharesTreasury Stock MethodQuestion Common stock outstanding was 100,000 shares. Options to purchase 5,000 shares of common stock are outstanding at the beginning of the year. The options can be exercised to p

39、urchase stock at $50 per share. The average market price of the stock was $80. The net increase in the DEPS denominator is a. 25,000 shares b. 5,000 shares c. 3,125 shares d. 1,875 shares New shares = 5,000Treasury shares = 3,125 Proceeds 5,000 $50 Avg. Mkt. Price $803. Incremental shares = 1,875 (5

40、,000 - 3,125)Treasury Stock MethodQuestionConvertible Securities If-Converted Method The if-converted method is used for Convertible securitiesConvertible preferred stockConvertible debt Convertible Securities If-Converted Method The method assumes conversion occurs as of the beginning of the period

41、 or date of issuance, if later.Convertible Securities If-Converted Method The assumed conversion of convertible bonds or preferred stock has two effects on DEPS calculations:Increases number of common shares outstanding in DEPS denominator.Decreases interest expense in the case of convertible bonds

42、and decreases preferred dividends in the case of convertible preferred stock (increases DEPS numerator).Convertible Securities If-Converted Method Since both the numerator and denominator of the DEPS formula rise, DEPS may decrease or increase after the assumed conversion.If DEPS decreases, the secu

43、rities are dilutive and are assumed converted.If DEPS increases, the securities are antidilutive and are not considered converted.Convertible Securities If-Converted Method Assume net e (after tax) of $500,000, cumulative convertible preferred stock dividends of $25,000, common stock outstanding of

44、50,000 shares, and a tax rate of 30%. The convertible preferred stock is convertible into 5,000 shares of common stock. Is the convertible preferred stock dilutive?If-Converted Method ExampleEPS without conversion:$500,000 - $25,000 50,000 shares= $9.50 EPSIf-Converted Method ExampleEPS without conv

45、ersion:$500,000 - $25,000 50,000 shares If the preferred stock is converted, we would not have dividends and the number of shares of common stock would increase by 5,000 shares. There is not a tax effect.= $9.50 EPSIf-Converted Method ExampleEPS without conversion:$500,000 - $25,000 50,000 shares If

46、 the preferred stock is converted, we would not have dividends and the number of shares of common stock would increase by 5,000 shares. There is not a tax effect.EPS after assumed conversion:$500,000 - 055,000 shares= $9.50 EPS= $9.09 EPSYes, it is dilutive.If-Converted Method Example Assume net e (

47、after tax) of $500,000, convertible bonds with interest expense of $50,000, common stock outstanding of 50,000 shares, and a tax rate of 30%. The bonds are convertible into 2,000 shares of common stock. Are the convertible bonds dilutive?If-Converted Method ExampleEPS without conversion:$500,000 - 0

48、50,000 shares= $10.00 EPSIf-Converted Method ExampleEPS without conversion:$500,000 - 050,000 shares If the bonds are converted, net e would increase by $35,000 (after taxes) and the number of shares of common stock would increase by 2,000 shares. = $10.00 EPSIf-Converted Method ExampleEPS without c

49、onversion:$500,000 - 050,000 shares If the bonds are converted, net e would increase by $35,000 (after taxes) and the number of shares of common stock would increase by 2,000 shares. EPS after assumed conversion:$535,000 - 052,000 shares= $10.00 EPS= $10.29 EPSNo, they are antidilutive.If-Converted

50、Method ExampleAre we at the end of the chapter? When a company has more than one potentially dilutive security . . . . . . the potentially dilutive securities are considered for inclusion in DEPS in sequence from the most dilutive to the least dilutive.Dilution-Antidilution (D/A) MethodCompute basic

51、 EPS.Compute the numerator and denominator effects as discussed earlier, and compute the D/A ratio.Rank from the lowest D/A (ranked 1st) to the highest D/A (ranked last).D/A = Numerator effectDenominator effectDilution-Antidilution (D/A) Method4. If the lowest D/A ratio basic EPS, then DEPS = basic

52、EPS. All securities are antidilutive so present only basic EPS.5. If the lowest D/A ratio basic EPS, then DEPS will be less than basic EPS. Incorporate this security into DEPS (tentative DEPS).Dilution-Antidilution (D/A) Method6. If the D/A ratio of the next highest-ranked security tentative DEPS, t

53、here are no more dilutive securities. Present basic EPS and DEPS as calculated in step 5.7. If the D/A ratio of the next highest-ranked security tentative DEPS, then incorporate this security into tentative DEPS as before.Dilution-Antidilution (D/A) Method8. Repeat step 7until:All potentially diluti

54、ve securities have been incorporated.ORThe remaining securities are antidilutive because their tentative D/A ratios exceed tentative DEPS.Dilution-Antidilution (D/A) MethodSimple = EPSComplex = EPS and DEPS e from continuing operations e before extraordinary itemsNet eEPS and DEPS values are desirab

55、le (but not required) for extraordinary items and discontinued operations.EPS and Related DisclosuresReconciliation of the numerators and the denominators of the basic and diluted per-share computations for e from continuing operations.The effect of any preferred shares on basic EPS.Securities that

56、could potentially dilute basic EPS but that are not currently antidilutive.Describe any transaction occurring after year-end that would have changed materially the number of common shares or potential common shares outstanding at the end of the period. EPS and Related Disclosures A representation of

57、 the firms accumulated net e or net loss less:accumulated cash dividendsproperty dividendsstock dividendsother transfers to owners capitalRetained EarningsOccurs when accumulated losses and distributions exceed accumulated earnings.Represented by a debit balance in Retained Earnings.Retained Earning

58、sDeficitA distribution of the firms earnings to shareholders.- Requires a debit to Retained Earnings regardless of the form of the dividend.The distribution will be in the physical form of assets or shares of stock.- Requires a credit to an asset account, or- Requires a credit to Capital Stock accou

59、nt.Definition of DividendsMost common forms:- Cash dividends- Property dividends- Stock dividendsLess common:- Liquidating dividends- Scrip dividendForms of DividendsCorporations are not required to pay dividends.Alternative uses of assets- Conserve cash for immediate use.- Expand, grow, and moderni

60、ze by investing in new assets.- Provide a cushion to minimize the effect of recessions and other unforeseen contingencies.DividendsReasons for Non-DistributionDate of declarationDate of recordEx-dividend dateDate of paymentDividendsImportant DatesThe date when the board of directors approves the amo