CHAPTER 16 Dilutive Securities and Earnings Per Share ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Problems Concepts for Analysis 1, 2, 3, 4, 5, 6, 7, 22, 23, 24, 25 1, Convertible debt Convertible preferred stock Warrants 2, 3, 8, 4, 7, 8, 9, 28 1, Stock compensation plans; restricted stock 10, 11, 12, 13, 14, 15 6, 7, 10, 11, 12, 13, 14 1, 3, 2, Earnings per share— Simple capital structure 18, 24 9, 15 17, 18, 19, 20, 21 6 EPS—Determining potentially dilutive securities 19, 20, 21 12, 13, 14 22, 23, 27 5, EPS—Treasury stock method 22, 23 28 5, EPS—Weightedaverage computation 16, 17 10, 11 EPS—General objectives 24, 25 9, 15 EPS—Comprehensive calculations 25, 26 11 EPS—Contingent shares *12 Stock appreciation rights 1, 2, Exercises 10 1, 2, 3, 4, 5, 6, Brief Exercises 24, 25 15, 16, 17, 18, 19, 20, 21 5, 6, 7, 8, 5, 22, 23, 24, 25, 26, 27, 28 5, 7, 8, 27 16 29, 30 *This material is dealt with in an Appendix to the chapter Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-1 16-2 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives Brief Exercises Exercises Problems 1, 2, 3, 4, 5, 1, Describe the accounting for the issuance, conversion, and retirement of convertible securities 1, 2 Explain the accounting for convertible preferred stock 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities 4, 1, 7, 8, Describe the accounting for stock compensation plans 6, 7, 10, 11, 12, 13, 14 1, 3, Compute earnings per share in a simple capital structure 9, 10, 11, 15 15, 16, 17, 18, 19, 20, 21 6, Compute earnings per share in a complex capital structure 12, 13, 14 22, 23, 24, 25, 26, 27, 28 5, 7, 16 29, 30 Discuss the controversy involving stock compensation plans *8 Explain the accounting for stock-appreciation rights plans *9 Compute earnings per share in a complex situation *10 Compare the accounting for dilutive securities and earnings per share for IFRS and GAAP Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-3 ASSIGNMENT CHARACTERISTICS TABLE Issuance and conversion of bonds Conversion of bonds Conversion of bonds Conversion of bonds Conversion of bonds Conversion of bonds Issuance of bonds with warrants Issuance of bonds with detachable warrants Issuance of bonds with stock warrants Issuance and exercise of stock options Issuance, exercise, and termination of stock options Issuance, exercise, and termination of stock options Accounting for restricted stock Accounting for restricted stock Weighted-average number of shares EPS: Simple capital structure EPS: Simple capital structure EPS: Simple capital structure EPS: Simple capital structure EPS: Simple capital structure EPS: Simple capital structure EPS with convertible bonds, various situations EPS with convertible bonds EPS with convertible bonds and preferred stock EPS with convertible bonds and preferred stock EPS with options, various situations EPS with contingent issuance agreement EPS with warrants Stock-appreciation rights Stock-appreciation rights Simple Simple Simple Moderate Simple Moderate Simple Simple Moderate Moderate Moderate Moderate Simple Simple Moderate Simple Simple Simple Simple Simple Simple Complex Moderate Moderate Moderate Moderate Simple Moderate Moderate Moderate Time (mi nut es) 15–20 15–20 10–15 15–20 10–20 25–35 10–15 10–15 15–20 15–25 15–25 15–25 10–15 10–15 15–25 10–15 10–15 10–15 20–25 10–15 10–15 20–25 15–20 20–25 10–15 20–25 10–15 15–20 15–25 15–25 P16-1 P16-2 P16-3 P16-4 P16-5 P16-6 P16-7 P16-8 P16-9 Entries for various dilutive securities Entries for conversion, amortization, and interest of bonds Stock option plan Stock-based compensation EPS with complex capital structure Basic EPS: Two-year presentation Computation of basic and diluted EPS Computation of basic and diluted EPS EPS with stock dividend and extraordinary items Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Complex 35–40 45–50 30–35 25–30 30–35 30–35 35–45 25–35 30–40 CA16-1 CA16-2 CA16-3 CA16-4 CA16-5 CA16-6 Warrants issued with bonds and convertible bonds Ethical issues—compensation plan Stock warrants—various types Stock compensation plans EPS: Preferred dividends, options, and convertible debt EPS, antidilution Moderate Simple Moderate Moderate Moderate Moderate 20–25 15–20 15–20 25–35 25–35 25–35 Ite m E16-1 E16-2 E16-3 E16-4 E16-5 E16-6 E16-7 E16-8 E16-9 E16-10 E16-11 E16-12 E16-13 E16-14 E16-15 E16-16 E16-17 E16-18 E16-19 E16-20 E16-21 E16-22 E16-23 E16-24 E16-25 E16-26 E16-27 E16-28 *E16-29 *E16-30 16-4 Description Level of Difficul ty Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) LEARNING OBJECTIVES Describe the accounting for the issuance, conversion, and retirement of convertible securities Explain the accounting for convertible preferred stock Contrast the accounting for stock warrants and for stock warrants issued with other securities Describe the accounting for stock compensation plans Discuss the controversy involving stock compensation plans Compute earnings per share in a simple capital structure Compute earnings per share in a complex capital structure *8 Explain the accounting for stock-appreciation rights plans *9 Compute earnings per share in a complex situation *10 Compare the accounting for dilutive securities and earnings per share for IFRS and GAAP *This material is covered in an Appendix to the chapter Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-5 CHAPTER REVIEW Chapter 16 examines the issues related to accounting for dilutive securities at date of issuance and at time of conversion The impact of the computation of earnings per share is presented The significance attached to the earnings per share figure by stockholders and potential investors has caused the accounting profession to direct a great deal of attention to the calculation and presentation of earnings per share Dilutive Securities (L.O 1) Dilutive securities are defined as securities that are not common stock in form, but enable their holders to obtain common stock upon exercise or conversion The most notable examples include convertible bonds, convertible preferred stocks, warrants, and contingent shares Convertible Bonds In the case of convertible bonds, the conversion feature allows the corporation an opportunity to obtain equity capital without giving up more ownership control than necessary The conversion feature entices the investor to accept a lower interest rate than he or she would normally accept on a straight debt issue Accounting for convertible bonds on the date of issuance follows the procedures used to account for straight debt issues If bonds are converted into other securities, the issue price of the stock is based upon the book value of the bonds No gain or loss is recorded as the issue price of the stock is recorded at the book value of the bonds Assume that Irvine Corporation has convertible bonds with a book value of $3,200 ($3,000 plus $200 unamortized premium) convertible into 120 shares of common stock ($10 par value) with a current fair value of $35 per share The journal entry to be made is as follows: Bonds Payable Premium on Bonds Payable Common Stock (120 × $10) Paid-in Capital in Excess of Par 3,000 200 1,200 2,000 When an issuer wishes to induce prompt conversion of its convertible debt to equity securities, the issuer may offer some form of additional consideration (“sweetener”) The sweetener should be reported as an expense in the current period at an amount equal to the fair value of the additional consideration given Convertible debt that is retired without exercise of the conversion feature should be accounted for as though it were a straight debt issue Any difference between the cash acquisition price of the debt and its carrying amount should be reflected currently in income as a gain or loss 16-6 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) Convertible Preferred Stock (L.O 2) Convertible preferred stock is accounted for in the same manner as nonconvertible preferred stock at date of issuance When conversion takes place, the book value method is used Preferred Stock, along with any related Paid-in Capital in Excess of Par, is debited; Common Stock and Paid-in Capital in Excess of Par (if an excess exists) are credited If the par value of the common stock issued exceeds the book value of the preferred stock, Retained Earnings is debited for the difference Stock Warrants (L.O 3) Stock warrants are certificates entitling the holder to acquire shares of stock at a certain price within a stated period Warrants are potentially dilutive When stock warrants are exercised, the holder must pay a specified amount of money to obtain the shares If stock warrants are attached to debt, the debt remains after the warrants are exercised 10 The issuance normally arises under one of three situations: a An equity ‘kicker’ to make another security move attractive b A pre-emptive right of existing shareholders c Compensation to executives and employees 11 When detachable stock warrants are attached to debt, the proceeds from the sale is allocated between the two securities This treatment is based on the fact that the stock warrants can be traded separately from the debt Allocation of the proceeds between the two securities is normally made on the basis of the warrants’ fair values at the date of issuance The amount allocated to the warrants is credited to Paid-in Capital—Stock Warrants The two methods of allocation available are (a) the proportional method and (b) the incremental method Issuing Stock Warrants—Proportional Method 12 To value the warrants under the proportional method, a value must be placed on the bonds without the warrants and then on the warrants Example, assume that Pontell Corporation issued 1,000, $500 bonds with warrants attached for par ($500,000) Each bond has one warrant attached It is estimated that the bonds would sell for 98 without the warrants and the value of the warrants in the market is $25,000 The allocation between the bonds and the warrants would be made as follows: Fair value of bonds (without warrants) ($500,000 × 98) Fair value of warrants Aggregate fair value Allocated to bonds: $490,000 $515,000 $490,000 25,000 $515,000 × $500,000 = $475,728 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-7 Allocated to warrants: $25,000 $515,000 × $500,000 = $ 24,272 The journal entry for the issuance of the bonds is: Cash (1,000 × $500) Discount on Bonds Payable Bonds Payable Paid-in Capital—Stock Warrants 500,000 24,272 500,000 24,272 Exercising Detachable Stock Warrants 13 When detachable warrants are exercised, Cash is debited for the exercise price and Paidin Capital—Stock Warrants is debited for the amount assigned to the warrants The credit portion of the entry includes Common Stock and Paid-in Capital in Excess of Par If detachable warrants are never exercised, Paid-in Capital—Stock Warrants is debited and Paid-in Capital Expired Stock Warrants is credited 14 Example: If all the warrants described in paragraph 12 are exercised for $15 cash and one warrant, the holder will receive one share of $5 par value common stock per warrant for each of the 1,000 warrants, the journal entry to record the transaction is the following: Cash (1,000 × $15) Paid-in Capital—Stock Warrants Common Stock (1,000 × $5) Paid-in Capital in Excess of Par 15,000 24,272 5,000 34,272 Issuing Stock Warrants—Incremental Method 15 Where the fair value of either the warrants or the bonds is not determinable, the incremental method may be used That is, the security for which the fair value is determinable is used and the remainder of the purchase price is allocated to the security for which the fair value is not known Stock Rights 16 Stock rights are issued to existing stockholders when a corporation’s directors decide to issue new shares of stock Each share owned normally entitles the stockholders to one stock right This privilege allows each stockholder the right to maintain his or her percentage ownership in the corporation Only a memorandum entry is required when rights are issued to existing stockholders 16-8 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) Stock Compensation Plans 17 A stock option is another form of warrant that arises in stock compensation plans used to pay and motivate employees This type of warrant gives selected employees the option to purchase common stock at a given price over an extended period of time The FASB has recently issued a new standard on stock options and other types of compensation plans that are listed on the stock market 18 In the past, the FASB gave companies a choice in the method of recognizing the cost of compensation under a stock option plan The two choices were: a the fair value method, and b the intrinsic value method The FASB now requires the use of the fair value method Fair Value Method of Recording Compensation Expense 19 Using the fair value method, total compensation expense is computed based on the fair value of the options expected to vest on the date the options are granted to the employees Fair value for public companies is estimated using an option-pricing model, with some adjustments for the unique factors of employee stock options No adjustments are made after the grant date in response to subsequent changes in the stock price Allocating Compensation Expense 20 (L.O 4) In general, compensation expense is recognized in the periods in which the employee performs the servicethe service period Unless otherwise specified, the service period is the vesting periodthe time between the date of grant and the vesting date 21 To illustrate the accounting for a stock-option plan, assume that on September 16, 2014, the stockholders of Jesilow Company approve a plan that grants the company’s three executives options to purchase 4,000 shares each of the company’s $1 par value common stock The options are granted on January 1, 2015, and may be exercised at any time within the following five years The option price per share is $30, and the market price of the stock at the date of grant is $40 per share Using the fair value method, total compensation expense is computed by applying an acceptable fair value option-pricing model Assume that the fair value option-pricing model determines total compensation expense to be $180,000 Assuming the expected period of benefit is years (starting with the grant date), the journal entries for each of the next three years are as follows: Compensation Expense ($170,000 ÷ 3) Paid-in Capital—Stock Options 60,000 60,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-9 If all of the options are exercised on July 1, 2019, the journal entry is as follows: Cash (12,000 × $30) Paid-in Capital—Stock Options Common Stock (12,000 × $1) Paid-in Capital in Excess of Par 360,000 180,000 12,000 528,000 Restricted Stock Compensation Plans 22 Restricted stock plans transfer shares of stock to employees, subject to an agreement that the shares cannot be sold, transferred or pledged until vesting occurs These shares are subject to forfeiture if the conditions for vesting are not met Major advantages of restricted-stock plans are: a Restricted stock never becomes completely worthless b Restricted stock generally results in less dilution to existing stockholders c Restricted stock better aligns the employee incentives with the companies’ incentives 23 Accounting for restricted stock follows the same general principles as accounting for stock options at the date of grant That is, the company determines the fair value of the restricted stock at the date of grant and then allocates that amount as an expense over the service period 24 To illustrate the accounting for restricted-stock plans, assume that on January 1, 2014, Lindsey Company issues 2,000 shares of restricted stock to its President, Amy Carlson Lindsey’s stock has a fair value of $12 per share on January 1, 2014 Additional information is as follows: a The service period related to the restricted stock is four years b Vesting occurs if Carlson stays with the company for a four-year period c The par value of the stock is $1 per share Lindsey makes the following entry on the grant date (January 1, 2014): Unearned Compensation Common Stock (2,000 × $1) Paid-in Capital in Excess of Par (2,000 × $11) 24,000 2,000 22,000 Unearned Compensation represents the cost of services yet to be performed, which is not an asset The company reports unearned compensation in stockholders’ equity in the balance sheet as a contra-equity account For the year ended December 31, 2014, Lindsey recognizes compensation expense of $6,000 (2,000 shares × $12 × 25%) and the same amount for each of the following three years 16-10 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) TEACHING TIP Illustration 16-2 provides a numerical example of convertible preferred stock at date of issue and at date of conversion (L.O 3) Stock warrants entitle the holder to acquire shares of stock at a price within a stated period a Normally issued as: (1) An “equity kicker” to make another security more attractive (2) A pre-emptive right to purchase additional shares given to existing shareholders (3) Compensation to executives and employees b Detachable stock warrants can be traded separately, and therefore, have a fair value (1) Proportional method is used when both the value of bonds without the warrants and the value of the warrants alone are known (a) Allocate the sale price of the bonds between the bonds and the warrants based on their respective fair values (2) Incremental method is used when only the value of the bonds without the warrants or the value of the warrants is known, but not both (a) Subtract the fair value of the known security from the sale price of the bonds to determine the value of the other security TEACHING TIP Illustration 16-3 provides a numerical example of stock warrants issued with debt securities using both the proportional and incremental methods (3) Warrants not exercised transfer the carrying value of the warrants from the PIC—Stock Warrants account to the PIC—Expired Stock Warrants account c The proceeds from issuing nondetachable stock warrants is recognized entirely as debt d Stock warrants representing stock rights to existing shareholders require no journal entry at the issuance date Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-17 Stock compensation plans are arrangements in which key employees are given the option to purchase common stock in the company (a form of warrant) at a given price over an extended period of time a The fair value method is used to record compensation expense based on the fair value of the stock options expected to vest on the date of grant using an acceptable option-pricing model (such as the Black-Scholes model) (1) Vesting occurs on the date the employee’s right to receive or retain the shares is no longer contingent on remaining in the service of the employer (2) Stock options issued to non-employees for goods or services are also recognized using this method (L.O 4) Accounting for stock compensation a Allocating Compensation Expense. Compensation expense is recognized over the service period (the time between the date of grant and the vesting date) (1) On date of grant: no journal entry required (2) At end of service period adjustment: (a) Compute total compensation expense using an acceptable fair value option-pricing model (b) Allocate the amount of compensation expense evenly over the service period Dr Compensation Expense Cr Paid-in Capital—Stock Options b Exercise of options Dr Cash Dr Paid-in Capital—Stock Options Cr Common Stock Cr Paid-in Capital in Excess of Par—Common Stock c Expiration of options. No adjustment is made to Compensation Expense Dr Paid-in Capital—Stock Options Cr Paid-in Capital—Expired Stock Options d 16-18 Forfeiture of options. This occurs if the employee leaves the company before the vesting date (recorded as a change in estimated compensation expense) Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) Dr Paid-in Capital—Stock Options Cr Compensation Expense Restricted-stock plans transfer shares of stock to employees, subject to an agreement that the shares cannot be sold, transferred, or pledged until vesting occurs a Advantages of such plans include: (1) Restricted stock never becomes completely worthless (2) Restricted stock generally results in less dilution to existing stockholders (3) Restricted stock better aligns employee incentives with company incentives b Accounting for restricted stock (1) Determine the fair value of the restricted stock on the grant date (2) Entry on grant date: Dr Unearned Compensation Cr Common Stock Cr Paid-in Capital in Excess of Par (a) Unearned compensation is a contra-equity account (3) Entry to record compensation expense: Dr Compensation Expense Cr Unearned Compensation (4) Entry to record forfeiture: Dr Common Stock Dr Paid-in Capital in Excess of Par—Common Stock Cr Compensation Expense (for total amount previously recorded) Cr Unearned Compensation Employee stock-purchase plans permit all employees to purchase stock at a discounted price for a short period of time a Considered compensatory and compensation is not reported unless all conditions are satisfied: (1) Substantially all full-time employees may participate on an equitable basis Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-19 (2) The discount from market is small (3) The plan offers no substantive option feature Disclosure of compensation plans Companies must disclose information that enables financial statement users to understand: a The nature and terms of the plan and its potential effects on shareholders b The income statement effects of compensation costs from share-based plans c The method used to estimate the fair value of goods or services received, or the fair value of the equity instruments granted d The cash flow effects from such plans B (L.O 5) Debate over stock options. The stock option saga illustrates the difficult, contentious nature of standard setting and shows the impact that social, economic, and public policy goals can have on the development of accounting standards C Computing Earnings Per Share TEACHING TIP Illustration 16-4 presents a conceptual overview of EPS computations (L.O 6) Simple capital structures exist when companies have only common stock, or have no securities that could potentially dilute earnings per share (EPS) if converted or exercised a EPS = Net Income - Preferred Dividends Weighted-Average Number of Shares Outstanding (1) EPS is calculated for each component of income: income from continuing operations, income before extraordinary items, and net income (2) Current year preferred stock dividends are subtracted from net income 16-20 (a) If the preferred stock is cumulative and no dividends are declared, then the dividend subtracted is equal to the amount of the current dividend that would have been paid (b) Dividends in arrears are not included (c) If a net loss occurs, the preferred dividend is added to the net loss Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) (3) Weighted-Average Shares Outstanding = Number of Shares Outstanding × Fraction of Year Outstanding (a) Shares issued or purchased during the period are weighted by the fraction of the period they are outstanding (b) If a stock dividend/split occurs during the year, it is treated as if it occurred at the beginning of the year (c) If a stock dividend/split occurs after year end, but before the financial statements are issued, the weighted-average number of shares is adjusted as if it occurred at the beginning of the year TEACHING TIP Illustration 16-5 demonstrates how to calculate the weighted-average number of common shares outstanding TEACHING TIP Illustration 16-6 provides an overview of calculating EPS with a complex capital structure (L.O 7) Complex capital structures exist when a company has convertible securities, options, warrants, and other rights that upon conversion or exercise could dilute EPS a Requires presentation of both basic and diluted EPS on the face of the income statement b Diluted EPS = c Net Income – Preferred Dividends Number of Weighted Average Shares Impact of – Convertible Securities – Impact of Options, Warrants, and Other Dilutive Securities Convertible securities (1) Convertible bonds (a) The if-converted method is applied The conversion is treated as if it occurred at the beginning of the year, or at its issuance date if it was issued during the year The weighted-average number of shares outstanding in the denominator is increased (b) Related interest expense, net of tax, is eliminated from the numerator Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-21 (2) (3) d Convertible preferred stock (a) Preferred dividends are eliminated from the numerator (b) The weighted-average number of shares outstanding is increased in the denominator The most advantageous conversion rate available to the holder of the security is used Options and warrants use the treasury stock method and assume: (1) The exercise occurs at the beginning of the year or issue date, if it issued during the year (2) Proceeds are used to purchase common stock for treasury stock at the average market price for common stock during the year (3) If exercise price < market price of stock, dilution occurs (4) If exercise price > market price, securities are antidilutive and can be ignored in the diluted EPS calculation e Contingent shares are included in the computation of diluted EPS f Convertibles, options, warrants, and contingently issuable shares are included in diluted EPS only if they are dilutive (reduce EPS) Antidilutive securities are ignored for purposes of computing EPS Presentation and disclosure a EPS is presented for income from continuing operations, discontinued operations, extraordinary items, income before extraordinary items, and net income b Reported for all periods presented c Prior period EPS is restated for any prior period adjustments d Additional EPS disclosure is required in note form for companies with complex capital structures and dual presentation of EPS *D (L.O 8) Accounting for Stock-Appreciation Rights Stock appreciation rights (SARs) a Stock appreciation rights (SARs) gives the recipient the right to receive compensation equal to the difference between the market price at exercise over a pre-established price (share appreciation) (1) Recipient does not buy the shares 16-22 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) (2) Recipient receives cash, shares, or a combination of both equal to the appreciation amount (3) Compared to nonqualified stock option plans and incentive plans, which both require cash payments on the exercise date, the executive experiences no cash outflows b Share-based equity awards (1) The recipient receives shares of stock equal to the share price appreciation (2) Accounting for such awards follows that used for stock options c Share-based liability awards (1) The recipient receives cash equal to the share appreciation amount (2) Accounting for such awards consists of: (a) Estimating the fair value of the award using an option-pricing model on the grant date (b) Allocating this estimated compensation amount over the service period using the percentage approach (c) If the exercise date occurs after the service period elapses, adjust the compensation expense for changes in market price (d) Cumulative compensation expense cannot be negative E (L.O 9) Appendix 16-B. Comprehensive EPS Illustration Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-23 *F IFRS Insights The primary IFRS related to financial instruments, including dilutive securities, is IAS 39, Financial Instruments: Recognition and Measurement.” The accounting for various forms of stock-based compensation under IFRS is found in IFRS 2, “Share-Based Payment.” This standard was recently amended, resulting in significant convergence between IFRS and GAAP in this area The IFRS addressing accounting and reporting for earnings per share computations is IAS 33, “Earnings per Share.” Similarities a IFRS and GAAP follow the same model for recognizing stock-based compensation: The fair value of shares and options awarded to employees is recognized over the period to which the employees’ services relate b Although the calculation of basic and diluted earnings per share is similar between IFRS and GAAP, the Boards are working to resolve the few minor differences in EPS reporting One proposal in the FASB project concerns contracts that can be settled in either cash or shares IFRS requires that share settlement must be used, while GAAP gives companies a choice The FASB project proposes adopting the IFRS approach, thus converging GAAP and IFRS in this regard Differences 16-24 a A significant difference between IFRS and GAAP is the accounting for securities with characteristics of debt and equity, such as convertible debt Under GAAP, all of the proceeds of convertible debt are recorded as long-term debt Under IFRS, convertible bonds are “bifurcated”—separated into the equity component (the value of the conversion option) of the bond issue and the debt component b Related to employee share-purchase plans, under IFRS, all employee sharepurchase plans are deemed to be compensatory; that is, compensation expense is recorded for the amount of the discount Under GAAP, these plans are often considered noncompensatory and therefore no compensation is recorded Certain conditions must exist before a plan can be considered noncompensatory—the most important being that the discount generally cannot exceed percent c Modification of a share option results in the recognition of any incremental fair value under both IFRS and GAAP However, if the modification leads to a reduction, IFRS does not permit the reduction but GAAP does d Other EPS differences relate to (1) the treasury-stock method and how the proceeds from extinguishment of a liability should be accounted for, and (2) how to compute the weighted average of contingently issuable shares Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ILLUSTRATION 16-1 ACCOUNTING FOR CONVERTIBLE DEBT Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-25 ILLUSTRATION 16-2 ACCOUNTING FOR CONVERTIBLE SECURITIES 16-26 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ILLUSTRATION 16-3 STOCK WARRANTS ISSUED WITH DEBT SECURITIES Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-27 ILLUSTRATION 16-4 EARNINGS PER SHARE OVERVIEW 16-28 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ILLUSTRATION 16-5 WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING COMPUTATION Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-29 16-30 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ILLUSTRATION 16-6 CALCULATING EPS WITH A COMPLEX CAPITAL STRUCTURE Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-31 ... Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-13 16-14 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual. .. Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 16-29 16-30 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual. .. Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ILLUSTRATION 16-1 ACCOUNTING FOR CONVERTIBLE DEBT Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate