UGBA 120AB Chapter 19 PART 2 Spring 2020 Without Solutions

Share-Based Compensation
and Earnings Per Share
Chapter 19
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of McGraw-Hill Education.
Earnings Per Share
Earnings Per Share (EPS)
Of the myriad facts and figures generated by accountants, the
single accounting number that is reported most frequently in
the media and receives by far the most attention by investors
and creditors is earnings per share
EPS is a way of summarizing the performance of business
enterprises in a single number
Because EPS is such a widely quoted number, the accounting
profession has promulgated many rules devised to achieve
consistency when reporting EPS to maximize comparability
from one company to the next
Basic Earnings Per Share
Earnings Weighted-average
EPS available to number of
common common shares
shareholders outstanding
Calculation of EPS becomes more demanding when:

– The number of shares has changed during the reporting period
– The earnings available to common shareholders are diminished by
dividends to preferred shareholders
– We take into account the impending effect of potential common
shares
Basic Earnings Per Share
Net income (after tax) – Preferred dividends * * Current period’s

cumulative preferred
stock dividends
Weighted average outstanding common stock (whether or not
declared) and
noncumulative preferred
Number of shares outstanding stock dividends (only if
declared)
× Number of months outstanding ÷ 12
Weighted average shares outstanding
Determining Weighted Average Shares Outstanding
(Denominator)
Impacts of stock:
§ Issuances
§ Dividends and Splits
§ Repurchases
Change in the nature of the shares is reflected in a calculation of
EPS by increasing the number of shares in a different way
Increase in shares from selling new Increase in shares caused by a

shares stock dividend
When new shares are sold, Stock dividend or stock split merely
both assets and shareholders’ equity increases the number of shares
are increased by an additional without affecting the firm’s assets.
investment in the firm by shareholders.
Shareholders’ interests in their Larger number of less valuable

company’s earnings is diluted. Less shares. Same “pie,” more slices.
ownership per shareholder.
Compute the weighted average number of shares of
common stock outstanding with issuance of new shares
Date Description No. of Shares

1/1 Balance 100,000
4/1 Issued 50,000
10/1 Issued 10,000
Annual Annual
Weighting Weighting
100,000 + [50,000 × (9/12)] + [10,000 × (3/12)] = 140,000
Shares New New
at Jan. 1 Shares Shares
Compute the weighted average number of shares of common
stock outstanding with a stock dividend or stock split
Common shares issued
as part of stock
Date Description No. of Shares dividends and stock
splits are treated
1/1 Balance 100,000 retroactively as
subdivisions of the
4/1 Issued 50,000 shares already
outstanding at the date
5/1 Stock dividend(100%) 150,000 of the split or dividend
Annual
Weighting
100,000 × (2.00) + [50,000 × (9/12) × 2.00] = 275,000
Shares New
at Jan. 1 Shares
100% stock dividend or

2:1 stock split
adjustment
Repurchased Shares
• The weighted-average number of shares is reduced if shares
are reacquired during the period
• Reacquired either as retired shares or as treasury stock
• The number of reacquired shares is time-weighted for the
fraction of the year they were not outstanding, prior to being
subtracted from the number of shares outstanding during the
period
• When a stock distribution occurs during the reporting period,
any sales or purchases of shares that occur before, but not after,
the distribution are increased by the distribution
Compute the weighted-average number of shares of
common stock outstanding with repurchased shares
Date Description No. of Shares

1/1 Balance 100,000
4/1 Issued 50,000
5/1 Repurchased shares 12,000
Annual Annual
Weighting Weighting
100,000 + [50,000 × (9/12)] – [12,000 × (8/12)] = 129,500
Shares New Repurchased
at Jan. 1 Shares Shares
Earnings Available to Common Shareholders
(Numerator)
• When a senior class of shareholders (like preferred
shareholders) is entitled to a specified allocation of
earnings (like preferred dividends) these amounts are
subtracted from earnings before calculating earnings per
share
• We subtract dividends on cumulative preferred stock,
even if not declared this period, the presumption being
that the dividends eventually will be paid.
Example: Preferred Dividends
Sovran Financial Corporation reported net income of $154 million in 2018 (tax rate
40%). Its capital structure included:
Common Stock
January 1 60 million common shares were outstanding
March 1 12 million new shares were sold
June 17 A 10% stock dividend was distributed
October 1 8 million shares were reacquired as treasury stock
Preferred Stock Nonconvertible
January 1 – December 31 5 million shares 8%, $10 par
(amounts in millions, except per share amount)
Basic EPS: Preferred 8% × $10 par × 5
Net income dividends million shares
$154 − $4 $150
= = $2.00
60 (1.10) + 12 (10 /12) (1.10) − 8 (3 /12) 75
Shares at New shares Treasury
Jan. 1 shares
Stock dividend
adjustment
Concept Check:
Earnings per Share
On December 31, 2017, Wayne Sparks Company had 600,000
shares of common stock issued and outstanding. Sparks issued
a 5% stock dividend on June 30, 2018. On September 30, 2018,
20,000 shares of common stock were reacquired as treasury
stock. What is the appropriate number of shares to be used in
the basic earnings per share computation for 2018?
a. 595,000
b. 625,000
c. 630,000
d. 635,000
Concept Check: Basic EPS
At December 31, 2018 and 2019, Hathcock Company had
outstanding 50 million common shares and 4 million
shares of 10%, $10 par cumulative preferred stock. Net
income for 2019 was $20 million. No dividends were
declared in 2018 or 2019. EPS for 2019 was:
a. $.32
b. $.37
c. $.40
d. $.48
Diluted Earnings Per Share
Potential Common Shares
• Securities that are not common stock but might become common
stock through their exercise or conversion
• Examples of potential common shares:
– Convertible bonds
– Convertible preferred stock
– Stock options
– Contingently issuable securities
• A firm with a complex capital structure reports two EPS calculations:
– Basic EPS ignores the dilutive effect of such securities
– Diluted EPS incorporates the dilutive effect of all potential common
shares
Stock Options, Rights, and Warrants
• Give holders the right to exercise their option to purchase common
stock, at a specified exercise price
• Dilution resulting from the possible exercise should be reflected in
the calculation of diluted EPS, but not basic EPS
• To include the dilutive effect of a security means to calculate EPS as if
the potential increase in shares already has occurred
• Assumptions:
– Options (or rights, or warrants) were exercised at the beginning of the
reporting period, or when the options were issued if that’s later
– Cash proceeds from selling the new shares at the exercise price are
used to buy back as many shares as possible at the shares’ average
market price during the year (Treasury Stock Method)
This method usually results in a net increase in shares included in the
denominator of the calculation of diluted earnings per share.
1. Determine new shares from assumed exercise of stock options

2. Compute number of shares repurchased
Proceeds from assumed exercise /
Average-of-period market price of stock
(100 options outstanding x exercise price of $20 = $2000) / average market price $25
= 80 shares assumed repurchased
3. Compute the incremental shares assumed outstanding

100 new shares assumed purchased less 80 treasury shares purchased
= 20 shares to add to the denominator
When the exercise price exceeds the market price (out of

the money options), the securities are antidilutive (do not
increase the shares outstanding denominator) and are
excluded from the calculation of diluted EPS.
(100 options outstanding x exercise price of $20 = $2000) / average market price $15 =
133 shares assumed repurchased
100 new shares assumed purchased less 133 treasury shares purchased =
(33) shares NOTHING TO ADD TO DENOMINATOR
Additional EPS Issues—Components of the “Proceeds” in the Treasury Stock Method
• In calculating diluted EPS when stock options are outstanding, we assume the options have been exercised. That is,
we pretend the company sold the shares specified by the options at the exercise price and that the “proceeds” were
used to buy back (as treasury stock) as many shares as can be purchased at the average market price of the stock
during the year. The proceeds for the calculation should include the amount received from the hypothetical exercise
of the options. 15M x $20 = $300 million
• The second component of the proceeds is the total compensation from the award that’s not yet expensed. An
example, if the fair value of an option had been $4 at the grant date, the total compensation would have been 15
million shares times $4, or $60 million. The exercise price is $20.
• Assumption 1: the options were fully vested before 2018, so all $60 million already had been expensed and this
second component of the proceeds was zero.
• Assumption 2: the options had been only half vested (after two years of a four-year vesting period), half the
compensation would have not yet been expensed and $30 million would be added to the 15M x $20 = $300 million
proceeds.
Why do the proceeds include these two components?
• The “proceeds” include everything the firm will receive from the award: (1) cash, if any, at exercise and (2) services
from the recipient (value of award given as compensation). The reason we exclude the expensed portion is that,
when it’s expensed, earnings are reduced, so that portion of the dilution already is reflected in net income and
therefore EPS.
• Excluding that expensed portion from the proceeds avoids the additional dilution that would occur if we included
those additional proceeds in our hypothetical buyback of shares. Hence, we avoid double-counting the dilutive effect
of the compensation.
Example: Stock Options
Common Stock
(The average market price of the common shares during 2018 was $25 per share)

Incentive Stock Options
Executive stock options granted in 2013, exercisable after 2017 for 15M common
shares at an exercise price of $20 per share
Example: Stock Options
Basic EPS (unchanged)
Net income Preferred dividends
$154 − $4 $150
= = $2.00
60 (1.10) + 12 (10/12) (1.10) − 8 (3/12) 75
Jan. 1 shares
Stock dividend
adjustment
Diluted EPS 15 million × $20 ÷ $25
$154 − $4 $150
= = $1.92
60 (1.10) + 12 (10/12) (1.10) − 8 (3/12) + (15 − 12) 78
Shares New shares Treasury Exercise of
at Jan. 1 shares options
Stock dividend
adjustment
Concept Check: Dilutive Shares Outstanding
Corbin Company had 100,000 shares of common

stock outstanding. Options to purchase 5,000 shares
of common stock were 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 increase in the dilutive
earnings per share denominator is:
a. 25,000 shares
b. 5,000 shares
c. 3,125 shares
d. 1,875 shares
Convertible Securities
• Securities that can be converted into (exchanged for) shares of
stock at the option of the holder of the security
– So, convertible securities are potentially dilutive
• The potentially dilutive effect of convertible securities is reflected
in diluted EPS calculations by pretending they were converted
• When we pretend they are converted:
– The denominator of the EPS fraction is increased by the additional
common shares that would have been issued upon conversion
– The numerator is increased by the interest (after-tax) on bonds or
other debt or the preferred dividends that would have been
avoided if the convertible securities had not been outstanding due
to having been converted
Example: Convertible Bonds
Common Stock
(The average market price of the common shares during 2018 was $25
per share.)
Executive stock options granted in 2013, exercisable after 2017 for 15
million common shares at an exercise price of $20 per share
Convertible Bonds
10%, $300 million face amount issued in 2017, convertible into 12M common shares
Example: Convertible Bonds
$154 − $4 $150
= = $2.00
60 (1.10) + 12( 10 /12) (1.10) − 8 (3/12) 75
Jan. 1 shares
Stock dividend
adjustment
Diluted EPS After-tax
10% x $300
interest
Net income Preferred dividends savings
$154 − $4
+ $30 − 40% *($30) $168
= = $1.87
60 (1.10) + 12 (10 /12) (1.10) − 8(3 /12) +(15 − 12) + 12 90
Shares New shares Treasury Exercise Conversion
at Jan. 1 shares of options of bonds
Stock dividend
adjustment
Concept Check: Diluted EPS
On January 2, 2018, Sarah Lawrence Co. issued at face value $10,000 of 4%
bonds convertible in total into 2,000 shares of Lawrence’s common
stock. No bonds were converted during 2018.
Throughout 2018, Lawrence had 10,000 shares of common stock
outstanding. Lawrence’s 2016 net income was $2,000. The income tax
rate is 40%.
No potential common shares other than the convertible bonds were
outstanding during 2018.
Diluted earnings per share for 2018 would be:
a. $.20
b. $.19
c. $.17
d. $.15
Convertible Preferred Stock
• EPS is calculated as if conversion already had occurred

• Effect on EPS calculation:
– Shares are added to the denominator of the EPS fraction
– The preferred dividends in the numerator are not subtracted
because those dividends would have been avoided if the preferred
stock had been converted
Example: Convertible Preferred Stock
Sovran Financial Corporation reported net income of $154 million in 2018 (tax rate 40%).
Its capital structure included:
Common Stock
(The average market price of the common shares during 2018 was $25 per share.)
Preferred Stock Convertible into 3 million common shares

Executive stock options granted in 2013, exercisable after 2017 for 15 million common
shares at an exercise price of $20 per share
Convertible Bonds
10%, $300 million face amount issued in 2017, convertible into 12 million common
shares
Example: Convertible Preferred Stock
$154 − $4 $150
= = $2.00
60 (1.10) + 12(10 ÷ 12) (1.10) − 8 (3 ÷ 12) 75
Shares at Treasury
New shares
Jan. 1 shares
Stock dividend
adjustment
Diluted EPS
After-tax interest
Net income Preferred dividends savings
$154 − $4 + $30 − 40% (30) $172
= = $1.85
60 (1.10) + 12(10 ÷ 12)(1.10)−8(3 ÷ 12)+(15 − 12)+ 12 +3 93
Shares New shares Treasury Exercise Conversion
Conversion
at shares of of preferred
Stock dividend of bonds
Jan. 1 options shares
adjustment
Concept Check: Convertible Preferred Stock
Ellen Kelly Inc. had 200,000 shares of $.50 par common

stock, 10,000 shares of 5%, $20 par cumulative preferred
stock, and 30,000 shares of 5%, $10 par preferred stock
convertible into 10,000 common shares. Net income after
taxes was $1,500,000. No dividends were declared during
the year. Diluted EPS would be:
a. $7.14
b. $7.07
c. $7.10
d. $7.00
Antidilutive Securities
• If the effect of the conversion or exercise of potential common
shares would be to increase, rather than decrease EPS
• Ignored when calculating EPS
Example: Stock Options, Warrants, Rights
• When the buyback (average market) price is higher than the
exercise price
– The number of shares assumed repurchased is fewer than the number
of shares assumed sold
– Shares are sold at the exercise price and repurchased at the market
price
– Buying back more shares than were sold
– Produces a net decrease in the number of shares
– EPS would increase, not decrease
Example: Antidilutive Warrants
Sovran Financial Corporation reported net income of $154 million in 2018
(tax rate 40%). Its capital structure included:
Common Stock
Preferred Stock, Convertible into 3 Million Common Shares
Executive stock options granted in 2013, exercisable after 2017 for 15 million
common shares at an exercise price of $20 per share
Convertible Bonds
10%, $300 million face amount issued in 2017, convertible into 12 million
common shares
Stock Warrants
Warrants granted in 2017, exercisable for 4 million common shares at an
exercise price of $32.50 per share
Calculations: Market price is $25 x 4M = 5.2M shares
The calculations of both basic and diluted EPS are unaffected by the warrants
because the effect of exercising the warrants would be antidilutive
Convertible Securities
• Difficult to determine whether the effect of conversion of convertible
securities would be dilutive or antidilutive
– Because the assumed conversion affects both the numerator and
the denominator of the EPS fraction
• Alternative way to determine whether convertible securities are
dilutive and should be included in a diluted EPS calculation:
Incremental effect
of conversion
> Basic EPS Antidilutive
Incremental effect >

Basic EPS Dilutive
of conversion
Example: Convertible Securities
Basic EPS = $2.00
Conversion of bonds
After-tax interest
savings
+ $30 − 40% *(30) = $18
= $1.50 < $2.00
+12 12
Dilutive
Conversion of preferred stock
Preferred dividends
+ $4
= $1.33 < $2.00
+ 3
Conversion of
preferred shares Dilutive
Order of Entry for Multiple Convertible Securities
• A convertible security might seem to be dilutive when looked at
individually but may be antidilutive when included in combination
with other convertible securities
• The earnings per incremental share is used to determine the

sequence of including securities’ effects
• The securities are included in reverse order, beginning with the

lowest incremental effect (that is, most dilutive), followed by the
next lowest (e.g. $1.33 then $1.50)
Restricted Stock Awards and Units (RSUs) in EPS Calculations
• Replacing stock options as the share-based compensation plan of choice
• Represents potential common shares; their dilutive effect is included in
diluted EPS
• The shares are added to the denominator and then reduced by the number
of shares that can be bought back with the “proceeds” at the average
market price of the company’s stock during the year (treasury stock method)
• The first component of the proceeds (that would come from stock options):
– Usually is absent because employees don’t pay to acquire their shares
– Unvested restricted stock award shares and RSU shares are included in
hypothetical Diluted EPS calculations
– Fully vested shares are distributed and thus outstanding (and in Basic EPS)
• The second component of the proceeds:
– The proceeds for the EPS calculation include the total compensation from the
unvested restricted stock that’s not yet expensed
Example: Restricted Stock Awards and Units (RSUs) in EPS Calculations
Under its restricted stock unit (RSU) plan, Universal Communications grants RSUs
representing five million of its $1 par common shares to certain key executives at
January 1, 2018. The shares are subject to forfeiture if employment is terminated
within four years. Shares have a current market price of $12 per share.
Diluted EPS at the end of 2018 (first year)

No adjustment to the numerator
5 million − 3.75* million = 1.25 million shares
During 2018: 5 million × $12 *Assumed purchase of treasury
= $60 million ÷ 4 years
= $15 million each for 4 years
$45 million
At 12/31/18: $60 million − 15 million ÷ $12 average market price
= $45 million (yet to be expensed, therefore 3.75 million shares
the proceeds)
Example: Restricted Stock Awards and Units (RSUs) in EPS Calculations
Under its restricted stock unit (RSU) plan, Universal Communications grants
RSUs representing five million of its $1 par common shares to certain key
executives at January 1, 2018. The shares are subject to forfeiture if
employment is terminated within four years. Shares have a current market price
of $12 per share.
Diluted EPS at the end of 2019 (second year)
5 million − 2.5* million = 2.5 million shares
5 million × $12
*Assumed purchase of treasury
= $60 million ÷ 4 years
= $15 million each for 4 years $30 million
2019 ÷ $12 average market price
$60 million − (15 million × 2) 2.5 million shares
= $30 million
Contingently Issuable Shares
• An agreement that specifies additional shares of common stock will be issued,
contingent on the occurrence of some future circumstance
• Contingent shares can be issuable to shareholders of an acquired company,
certain key executives, or others in the event a certain level of performance is
achieved
– Contingent performance may be a desired level of income, a target stock
price, or some other measurable activity level
• Considered to be outstanding in the computation of Diluted EPS if the target
performance level already is being met
Example: If shares will be issued at a future date if a certain level of income is

achieved and that level of income or more was already reported this year, those
additional shares are added to the denominator of the diluted EPS fraction
Example: Contingently Issuable Shares
If the target income next year is $150 million
Sovran Financial Corporation reported net income of $154 million
in 2018 (tax rate 40%). Assume 3 million additional shares will
become issuable to certain executives in the following year (2019)
if net income that year is $150 million or more.
Assumed Issuance of Contingently Issuable Shares (diluted EPS):
$154 million > $150 million

+ 3M
additional shares
Example: Contingently Issuable Shares
If the target income next year is $160 million
Example:
Sovran Financial Corporation reported net income of $154 million
in 2018 (tax rate 40%). Assume 3 million additional shares will
become issuable to certain executives in the following year (2019)
if net income that year is $160 million or more.
$154 million < $160 million
So:
The contingent shares are ignored
Contingently Issuable Shares—Hunt Manufacturing Company
SUMMARY: When Potential Common Shares Are Reflected in EPS
Is the Dilutive Effect

Reflected in the
Calculation of EPS?*
Potential Common Shares Basic EPS Diluted EPS
• Stock options (or warrants, rights) no yes
• Restricted stock no yes
• Convertible securities (bonds, no yes
notes, preferred stock)
• Contingently issuable shares no yesƗ
*The effect is not included for any security if its effect is antidilutive.
ƗUnless shares are contingent upon some level of performance not yet achieved.
SUMMARY: How Potential Common Shares Are Reflected
in a Diluted EPS Calculation
Financial Statement Presentation of Earnings Per Share Data
• Basic EPS and diluted EPS must be reported separately for income
from continuing operations and net income when the income
statement includes discontinued operations
• Per share amounts for discontinued operations would be disclosed
either:
– On the face of the income statement or
– In the notes to financial statements
• For all reporting periods presented in the comparative statements
• Businesses without potential common shares present basic EPS
only
EPS Disclosure—H&R Block
Consolidated Income Statements (partial)

For the Years Ended April 30, 2016 and 2015
Basic EPS and diluted EPS
2016 2015 must be reported
Net income from continuing operations $383,553 $486,744 separately for income from
Net loss from discontinued operations (9,286) (13,081) continuing operations and
net income when the
Net income $374,267 $473,633 income statement includes
Basic Earnings (Loss) Per Share: discontinued operations
Continuing operations $1.54 $1.77
For all reporting periods
Discontinued operations (0.04) (0.05) presented in the
Consolidated $1.50 $1,72 comparative statements
Diluted Earnings (Loss) Per Share:
Businesses without
Continuing operations $1.53 $1.75 potential common shares
Discontinued operations (0.04) (0.04) present basic EPS only
Consolidated $1.49 $1.71
Reconciliation of Basic EPS Computations to Diluted EPS Computations
Disclosure notes should provide
additional disclosures including:
Earnings per Share Reconciliation:
• A reconciliation of the numerator
Income Share Per Share and denominator used in the basic
(Numerator) (Denominator) Amount EPS computations to the
numerator and the denominator
Net income $ 154 used in the diluted EPS
computations
Preferred dividends (4)
• Any adjustments to the numerator
Basic earnings per share 150 75 $2.00 for preferred dividends
• Any potential common shares that
Stock options None 3 weren’t included because they
Convertible debt 18 12 were antidilutive
• Any transactions that occurred
Convertible preferred stock 4 3 after the end of the most recent
Diluted earnings per share $ 172 93 $1.85 period that would materially affect
earnings per share (“subsequent
event”)
Review of Earnings per Share
Disclosures
We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected tolling of the statute of
limitations in various taxing jurisdictions.
Note 13. Earnings Per Share

Table of Contents
Basic and diluted earnings per share are computed on the basis of the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share also include the incremental effect of dilutive potential common shares outstanding during the
period using the treasury stock method. Dilutive potentialSYMANTEC CORPORATION
common shares include the dilutive effect of shares underlying outstanding stock
options, restricted stock, warrants, and convertible senior notes. Financial Statements — (Continued)
Notes to Consolidated
100
The components of earnings per share attributable to Symantec Corporation stockholders are as follows:
Year Ended
March 29, March 30, April 1,
2013 2012 2011

(In millions, except per share data)
Net income $ 765 $ 1,172 $ 597
Net income per share — basic $ 1.09 $ 1.58 $ 0.77
Net income per share — diluted $ 1.08 $ 1.57 $ 0.76
Weighted average outstanding common shares — basic 701 741 778
Dilutive potential shares issuable from assumed exercise of stock options 2 3 4
Dilutive potential shares related to stock award plans 6 4 4
Dilutive potential shares related to convertible senior notes (1) 2 — —
Weighted average shares outstanding — diluted 711 748 786
Anti-dilutive weighted-average stock options 20 32 47
Anti-dilutive weighted-average restricted stock 2 — 1
Anti-dilutive effect of note hedge (1) 2 — —
(1)
See Note 6 for information regarding the effects of the convertible senior notes, and the warrants issued and the option purchased in
connection with the convertible senior notes.
Note 14. Noncontrolling Interest

As of March 30, 2012, we owned 54% of VeriSign Japan. During the second quarter of fiscal 2013, we completed a tender offer and paid
$92 million to acquire VeriSign Japan common shares and stock rights, which increased our ownership percentage to 92%. During the third
quarter of fiscal 2013, we acquired the remaining 8% interest for $19 million and it became a wholly-owned subsidiary. The payment for the
remaining 8% interest was made in the fourth quarter of fiscal 2013.
The effect of the change in our ownership interest in VeriSign Japan on our equity is as follows:
E19-16. On December 31, 2017, Berclair Inc. had 200 million shares of
common stock and 3 million shares of 9%, $100 par value cumulative
preferred stock issued and outstanding.
On March 1, 2018, Berclair purchased 24 million shares of its
common stock as treasury stock.
Berclair issued a 5% common stock dividend on July 1, 2018.
Four million treasury shares were sold on October 1.
Net income for the year ended December 31, 2018, was $150 million.
Compute Berclair’s earnings per share for the year ended December
31, 2018.
Reading and Exercises
§ Read Chapter 19
§ In Class: E19-3, E19-7, E19-11, E19-16, E19-29
§ Discussion: E19-2, E19-6, E19-10, E19-17, E19-30
§ On Your Own: E19-1, E19-8, E19-18, E19-31

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Share-Based Compensation

and Earnings Per Share

Calculation of EPS becomes more demanding when:

Net income (after tax) – Preferred dividends * * Current period’s

Increase in shares from selling new Increase in shares caused by a

Shareholders’ interests in their Larger number of less valuable

Date Description No. of Shares

100% stock dividend or

Date Description No. of Shares

1. Determine new shares from assumed exercise of stock options

3. Compute the incremental shares assumed outstanding

When the exercise price exceeds the market price (out of

Preferred Stock Nonconvertible

Corbin Company had 100,000 shares of common

• EPS is calculated as if conversion already had occurred

Preferred Stock Convertible into 3 million common shares

Ellen Kelly Inc. had 200,000 shares of $.50 par common

Incremental effect >

• The earnings per incremental share is used to determine the

• The securities are included in reverse order, beginning with the

Diluted EPS at the end of 2018 (first year)

Example: If shares will be issued at a future date if a certain level of income is

Assumed Issuance of Contingently Issuable Shares (diluted EPS):

$154 million > $150 million

No adjustment to the numerator

$154 million < $160 million

Is the Dilutive Effect

Consolidated Income Statements (partial)

Note 13. Earnings Per Share

2013 2012 2011

Note 14. Noncontrolling Interest

§ In Class: E19-3, E19-7, E19-11, E19-16, E19-29

§ Discussion: E19-2, E19-6, E19-10, E19-17, E19-30

§ On Your Own: E19-1, E19-8, E19-18, E19-31

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