Earnings per Share
The Board continued with its discussions with a view to finalising the short-term convergence project with the FASB on the amendment to IAS 33.
The Board had previously made decisions to follow the FASB proposal of not adjusting earnings or the number of shares when a derivative over own equity is fair valued through income. This would apply to stand-alone derivatives over own equity, as well as embedded derivatives that fail the definition of equity.
At this meeting the Board agreed to extend that principle to instruments that are potentially convertible into shares where the whole instrument does not meet the definition of equity and is a financial liability that is fair valued through income. An example would be where the entity has applied the fair value option to the whole instrument and therefore does not recognise a separate embedded derivative.
The Board also agreed that, in computing diluted EPS under the two-class method, actual distributions paid to outstanding common stockholders should be used.
The Board discussed potential differences that may exist between US GAAP and IFRSs in the accounting for forward purchase contracts and to a lesser extent, written puts over own equity.
The Board proposed that gross physically settled forward contract were not dilutive as the entity is considered to have acquired the equity upon entering into the arrangement. The Board also believed that any dividends payable on equity shares that are subject to the forward contract would be recognised as an expense. A comparison was made of the IASB's and FASB's approaches for various instruments. In some circumstances the EPS result was the same even though the method of computation differed. In other instances the EPS result was different because the underlying accounting for the potential ordinary share differed.
There was further discussion on an issue not included in the Board paper on forward purchase arrangement where the dividends on the shares were returned to the issuer (the example in the Board paper assumed dividends were retained by the counterparty to the forward contract) and whether a different EPS would result under IFRSs and US GAAP. The Board did not wish to have a difference in this respect and therefore agreed to bring back this issue in September for further.
With regard to convergence, the Board noted that convergence is achieved if EPS is calculated in the same way. However, different EPS amounts under US GAAP and IFRSs could still result from differences in the underlying accounting for instruments.
The amendments to IAS 33 are intended to be effective for annual periods beginning 1 January 2009 to coincide with the FASB's proposed effective date for annual periods beginning after 15 December 2008.