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Earnings per share: Key differences between U.S. GAAP and IFRSs

Under U.S. GAAP, the source of guidance on earnings per share (EPS) is ASC 260.

Under IFRSs, IAS 33, Earnings per Share, is the sole source of guidance on EPS.

Although IFRSs and U.S. GAAP use similar methods to calculate both basic and diluted EPS, there are detailed application differences.

The table below summarizes these differences and is followed by an explanation of each difference.1

SubjectU.S. GAAPIFRSs

Scope

Presentation of EPS for investment companies and wholly owned subsidiaries is not required.

No scope exceptions are provided for presenting EPS for investment companies or wholly owned subsidiaries.

Numerator (earnings) differences

Many accounting differences between U.S. GAAP and IFRSs affect net income (or loss) available to common shareholders (or the equivalent). Each of those differences will result in differences in EPS.

See U.S. GAAP.

Numerator (earnings) difference: forward and option contracts that require or may require physical settlement by repurchase of equity shares

Other than forward contracts that require physical settlement by repurchase of a fixed number of the issuer's equity shares, forward and option contracts that require or may require physical settlement by repurchase of equity shares are measured at fair value with changes in fair value recognized in earnings. Contracts measured at fair value include (1) forward contracts to purchase outstanding shares that give the counterparty (holder) the option to elect either gross physical settlement or net settlement and (2) written options that give the counterparty the right to put outstanding shares and that either require gross physical settlement or give the counterparty the option to elect either gross physical or net settlement.

Such contracts are liabilities measured on the basis of the gross present value amount that the issuer could be required to pay to repurchase its own equity shares.

As a result of the different accounting treatment for these contracts (other than forward contracts that require physical settlement), basic and diluted EPS under IFRSs will differ from basic and diluted EPS under U.S. GAAP. This is because earnings (i.e., the numerator) include changes in the fair value of these contracts under U.S. GAAP, whereas under IFRSs the amount of earnings is the change in the present value of the amount that the issuer could be required to pay to repurchase its own equity shares.

Treatment of mandatorily redeemable common shares and forward contracts that require physical settlement of a fixed number of shares for cash

Basic EPS — Exclude the common shares (and any related earnings effect) that are to be redeemed or repurchased in calculating EPS. Apply the two-class method of calculating EPS.

Diluted EPS — No further adjustment to the numerator or the denominator is necessary.

Forward contracts that require physical settlement of a fixed number of shares for cash:

· Basic EPS — Treat the shares as outstanding (and include any earnings impact in the numerator).

· Diluted EPS — Apply the reverse treasury stock method to the extent that the instrument is dilutive.

Mandatorily redeemable common shares (basic and diluted EPS):

These shares are typically excluded from the denominator.

Treatment of mandatorily convertible instruments

Not directly addressed. However, if the instrument is participating, then entities should apply the two-class method (similar in result to considering the shares outstanding). If the instrument is not participating, entities make no adjustment to the numerator or denominator in computing basic EPS.

Ordinary shares that will be issued upon conversion are considered outstanding in the calculation of basic EPS from the date the contract is entered into irrespective of whether the contract is participating. The result is similar to that from applying the two-class method, but the presentation differs. However, the EPS result differs from that calculated under U.S. GAAP when the instrument is not participating.

Application of the two-class method to participating securities

Method applies to participating securities irrespective of whether they are debt or equity instruments.

Detailed application guidance is included in ASC 260.

Method applies only to participating securities that are equity instruments. Not required for participating debt instruments (e.g., participating convertible debt).

No detailed application guidance.

Diluted EPS denominator difference: treasury stock method — year-to-date computation

For year-to-date diluted EPS, the number of incremental shares included in the denominator is determined using a weighted average of the number of incremental shares included in each quarterly diluted EPS computation.

The number of incremental shares is determined independently for each period presented. The number of dilutive potential ordinary shares in the year-to-date period is not a weighted average of the dilutive potential ordinary shares included in each interim computation.

Diluted EPS denominator difference: contingently issuable shares — year-to-date computation

For year-to-date computations, the number of contingent shares included in the diluted EPS denominator is determined by weighting the interim periods.

Weighting interim periods in the year-to-date computation is not permitted. See "treasury stock method — year-to-date computation" above.

Diluted EPS denominator difference: contracts that may be settled in cash or shares

Inclusion of the shares in diluted EPS is based on a rebuttable presumption that the contracts will be settled in shares (if more dilutive). The presumption that the contract will be settled in shares may be overcome if past experience or a stated policy provides a reasonable basis to believe that the contract will be paid partially or wholly in cash.

For contracts that may be settled in cash or ordinary shares at the issuer's option, diluted EPS must be based on a presumption that the contract will be settled in ordinary shares. The presumption of share settlement may not be overcome. For contracts that may be settled in cash or ordinary shares at the holder's option, the more dilutive of cash settlement or share settlement must be used in calculating diluted EPS.

Presentation of EPS for extraordinary items

Entities should present EPS for an extraordinary item on the face of the income statement or in the notes to the financial statements.

Entities are not permitted to classify items as extraordinary.

Scope

Under U.S. GAAP, ASC 260-10-15-3 provides a scope exception for investment companies and wholly owned subsidiaries. Thus, such entities are not required to present EPS even if their common stock or potential common stock is traded in a public market or they have made, or are making, a filing with a regulatory agency in preparation for the sale of such securities in a public market.

Under IFRSs, paragraph 2 of IAS 33 does not provide any scope exceptions for investment companies or wholly owned subsidiaries. Thus, such entities are required to present EPS if their ordinary shares or potential ordinary shares are traded in a public market or they have made, or are making, a filing with a regulatory organization to issue ordinary shares in the public market. However, in accordance with paragraph 4 of IAS 33, "[w]hen an entity presents both consolidated financial statements and separate financial statements," the entity is required to present EPS "only on the basis of the consolidated information."

Numerator (Earnings) Differences

Accounting differences between U.S. GAAP and IFRSs affect the amount of reported earnings (numerator) and, consequently, result in EPS differences even though the method used for calculating EPS is often the same. For example, U.S. GAAP and IFRSs both apply the if-converted method to convertible securities for EPS purposes, yet the accounting (e.g., the initial and subsequent measurement) for convertible securities often differs. Under both sets of standards, a calculation may have the same denominator (in the absence of other denominator differences), but the numerator will probably differ. This is because of the numerous accounting differences between U.S. GAAP and IFRSs that have an effect on reported net earnings. In addition, the "Numerator (Earnings) Difference: Forward and Option Contracts That Require or May Require Physical Settlement by Repurchase of Equity Shares" section below discusses one numerator difference related to contracts to repurchase shares.

Numerator (Earnings) Difference: Forward and Option Contracts That Require or May Require Physical Settlement by Repurchase of Equity Shares

Under U.S. GAAP, ASC 480-10-30-7 and ASC 480-10-35-5 indicate that other than forward contracts that require physical settlement by purchase of a fixed number of outstanding shares, forward and option contracts that require or may require physical settlement by repurchase of outstanding shares are accounted for at fair value with changes in fair value recognized in earnings. Such contracts include:

  • Forward contracts to purchase shares that give the counterparty (holder) the option to elect either gross physical settlement or net settlement.
  • Written options that give the counterparty a right to put shares back to the issuer and that either require gross physical settlement or give the counterparty the option to elect either gross physical or net settlement.

No adjustments are made to the numerator or denominator for basic EPS for these contracts under U.S. GAAP. In accordance with ASC 260-10-45-35 and 45-36, diluted EPS is computed using the reverse treasury stock method to the extent that the effect is dilutive.

Under IFRSs, any contract that may result in the issuer's being required to gross settle a repurchase of its own equity instruments for cash or other financial assets is classified as a financial liability. The financial liability is measured at the gross present value amount that the issuer could be forced to pay to repurchase its own equity. This treatment applies irrespective of whether the amount to be repaid to repurchase the entity's own equity is fixed or variable, or of whether the counterparty has a choice between settling net or gross. In addition, it applies to both forward purchase contracts and written put options.

IFRSs are similar to U.S. GAAP in that no adjustments to the numerator or denominator are made for basic EPS. In accordance with paragraph 63 of IAS 33, diluted EPS is computed using the reverse treasury stock method to the extent the effect is dilutive.

While the methods for calculating EPS are the same under U.S. GAAP and IFRSs for both basic and diluted EPS, EPS amounts will probably differ. This is because the impact on earnings is determined on the basis of changes in fair value of the contract under U.S. GAAP and on the basis of changes in the gross present value amount for which the issuer could be forced to settle the repurchase of its own equity under IFRSs. Thus, the EPS numerator will differ.

Treatment of Mandatorily Redeemable Common Shares and Forward Contracts That Require Physical Settlement of a Fixed Number of Shares for Cash

Basic EPS

Under U.S. GAAP, an entity should exclude the shares that are to be redeemed or repurchased from the EPS denominator and apply the two-class method of EPS. ASC 480-10-45-4 states that when applying the two-class method of EPS, an entity deducts from net income available to common shareholders any "contractual (accumulated) dividends and participation rights in undistributed earnings, attributable to shares that are to be redeemed or repurchased" unless they are already recognized as interest cost.

IFRSs do not have basic EPS guidance for these instruments. Under IFRSs:

  • For mandatorily redeemable common shares, the basic EPS treatment could be analyzed as follows:
  • Paragraph 10 of IAS 33 indicates that the denominator in the basic EPS calculation is "the weighted average number of ordinary shares outstanding . . . during the period" (emphasis added). Paragraph 5 of IAS 33 states that an "ordinary share is an equity instrument that is subordinate to all other classes of equity instruments" (emphasis added). Thus, whether a mandatorily redeemable common share is included in the denominator in the basic EPS calculation depends on whether the mandatorily redeemable common share (1) is considered an equity instrument and (2) is in the most subordinate class of equity instrument. Note that mandatorily redeemable common shares are considered a liability under IFRSs (see paragraph 16(a)(i) of IAS 32, Financial Instruments: Presentation), but that certain amendments to IAS 32 may change this analysis for some mandatorily redeemable common shares (see Note below).
  • For forward contracts that require physical settlement of a fixed number of equity shares for cash or other financial assets, IFRSs require a liability to be presented that is equal to the present value of the amount the issuer would be required to settle under the contract. Typically, under IFRSs, an entity would consider the equity shares that are to be repurchased outstanding in the basic EPS calculation because the equity shares have yet to be repurchased as of the balance sheet date.

U.S. GAAP and IFRSs differ in their treatment of these instruments. Under U.S. GAAP, entities apply the two-class method for calculation of EPS for these instruments, while under IFRSs they do not.2 In addition, shares that are to be repurchased under forward contracts are considered outstanding under IFRSs, but not under U.S. GAAP.

In February 2008, the IASB amended IAS 32 to require equity classification for some puttable financial instruments and some financial instruments that create an obligation to deliver to another party a pro rata share of the net assets of the entity only upon liquidation. The amendments are effective for annual periods beginning on or after January 1, 2009. Early application is permitted.

Diluted EPS

Under U.S. GAAP, no further adjustment is made for diluted EPS. According to ASC 480-10-45-4, the entity simply carries forward the basic two-class method for calculating diluted EPS.

Under IFRSs, paragraph 63 of IAS 33 indicates that an entity would apply the reverse treasury stock method to the forward repurchase agreement in the calculation of diluted earnings per share if the effect is dilutive.

Thus, U.S. GAAP and IFRSs differ with regard to forward repurchase agreements because no further adjustment to the basic EPS two-class method result is made under U.S. GAAP, while under IFRSs entities apply the reverse treasury stock method to the forward repurchase agreement to the extent that the instrument is dilutive. The application of the reverse treasury stock method can result in incremental shares being added to the denominator.

There is no diluted EPS guidance under IFRSs for mandatorily redeemable common shares. However, the mandatorily redeemable common shares discussion in the Basic EPS subsection above applies by extension to diluted EPS. That is, if the mandatorily redeemable common shares are not ordinary shares or potential ordinary shares as described in paragraph 5 of IAS 33, then the shares are not included in diluted EPS. Note that mandatorily redeemable common shares are considered a liability under IFRSs (see paragraph 16(a)(i) of IAS 32), but that certain amendments to IAS 32 may change this analysis for some mandatorily redeemable common shares (see the Note in the "Basic EPS" section above). 

Treatment of Mandatorily Convertible Instruments

Unlike IFRSs, U.S. GAAP do not directly address the basic EPS implications of mandatorily convertible instruments. However, if the instrument is participating, an entity should apply the two-class method of computing EPS in accordance with ASC 260-10-45-59A through 45-70. If the instrument is not participating, then there is no impact on basic EPS. In addition, if the instrument is not participating and the effect is dilutive, an entity would apply the if-converted method for computing diluted EPS under ASC 260-10-45-40.

Under IFRSs, entities do not apply the two-class method to these instruments. Instead, paragraph 23 of IAS 33 indicates that entities should consider the shares outstanding in the calculation of basic EPS and diluted EPS from the date the contract is entered into.

If the instrument is participating, the EPS presentation required under U.S. GAAP differs from that required under IFRSs, since under U.S. GAAP an entity applies the two-class method for calculating both basic and diluted EPS, while under IFRSs an entity considers the shares outstanding.

U.S. GAAP and IFRSs also differ when the instrument is not participating. This is because under U.S. GAAP, entities make no adjustment to the numerator or denominator for calculation of basic EPS, while under IFRSs the shares are considered to be outstanding, which increases the denominator. The net result is that basic EPS will be lower under IFRSs than under U.S. GAAP. For diluted EPS, results under U.S. GAAP and IFRSs will also differ, since under U.S. GAAP an entity will apply the if-converted method (thereby increasing outstanding shares and removing from the numerator any income statement impact from the mandatorily convertible instrument), while under IFRSs the shares are considered outstanding and no adjustment is made to the numerator. The net result is that diluted EPS results are lower under IFRSs than under U.S. GAAP.

Application of the Two-Class Method to Participating Securities

Scope

Under ASC 260-10-45-59A through 45-70 in U.S. GAAP, the two-class method of computing basic EPS applies both to debt and equity instruments if they are participating securities. However, paragraphs A13 and A14 of IAS 33 under IFRSs only require the application of the two-class method to participating equity instruments. Thus, under U.S. GAAP there are potentially more securities that require the application of the two-class method of computing EPS than there are under IFRSs.

Participating Convertible Securities

Under U.S. GAAP, participating convertible securities are included in the computation of basic EPS using the two-class method. This is the case for both participating convertible preferred stock and participating convertible bonds. Under ASC 260-10-45-60A, entities are precluded from applying the if-converted method in calculating basic EPS for these instruments.

As discussed above, under IFRSs entities do not apply the two-class method to participating debt instruments. Thus, under IFRSs the two-class method of computing basic EPS does not apply to participating convertible debt. An entity would make no adjustment to the numerator or denominator for these instruments in computing basic EPS. Whether the two-class method applies to participating convertible preferred stock depends on its balance sheet classification. If the participating convertible preferred stock is classified as a liability, then the two-class method does not apply. If the participating convertible preferred stock is classified as equity, then the two-class method applies.

Detailed Guidance

Under U.S. GAAP, ASC 260 contains detailed application guidance on applying the two-class method of computing EPS. There is no similar detailed application guidance under IFRSs. This may lead to U.S. GAAP entities and IFRSs entities applying the two-class method of computing EPS differently.

Diluted EPS Denominator Difference: Treasury Stock Method — Year-to-Date Computation

Under U.S. GAAP, the number of incremental shares included in quarterly diluted EPS is computed using the average market prices during the three months in the reporting period. ASC 260-10-55-3 indicates that "[f]or year-to-date diluted EPS, the number of incremental shares [is determined using] a year-to-date weighted average of the number of incremental shares included in each quarterly diluted EPS computation."

Under IFRSs, paragraph 37 of IAS 33 states that the number of incremental shares "shall be determined independently for each period presented." This is consistent with paragraph 29 of IAS 34, Interim Financial Reporting, which states that "the frequency of an entity's reporting shall not affect the measurement of its annual results." Thus, in accordance with paragraph 37 of IAS 33, "[t]he number of dilutive potential ordinary shares included in the year-to-date period is not a weighted average of the dilutive potential ordinary shares included in each interim computation." Instead it is the weighted average for the year-to-date period.

Diluted EPS Denominator Difference: Contingently Issuable Shares — Year-to-Date Computation

Under U.S. GAAP, ASC 260-10-45-49 states, "For year-to-date [EPS] computations, contingent shares shall be included on a weighted-average basis. That is, contingent shares shall be weighted for the interim periods in which they were included in the computation of diluted EPS" (emphasis added).

Under IFRSs, paragraph 52 of IAS 33 does not permit entities to calculate year-to-date contingent shares by weighting the interim periods. This is consistent with paragraph 29 of IAS 34, which states that "the frequency of an entity's reporting shall not affect the measurement of its annual results."

Diluted EPS Denominator Difference: Contracts That May Be Settled in Cash or Shares

Under U.S. GAAP, ASC 260-10-45-45 indicates that "[i]f an entity issues a contract that may be settled in common stock [shares] or in cash at the election of either the entity [issuer] or the holder, [the entity must presume that] the contract will be settled in common stock . . . if the effect is more dilutive." However, ASC 260-10-45-46 goes on to say that this presumption "may be overcome if past experience or a stated policy provides a reasonable basis to believe that the contract will be paid partially or wholly in cash" (emphasis added).

Under paragraph 58 of IAS 33, when "an entity has issued a contract that may be settled in ordinary shares or cash at the entity's option, the entity shall presume that the contract will be settled in ordinary shares" (emphasis added). U.S. GAAP and IFRSs differ on this, since under IFRSs there is no ability to overcome the presumption of share settlement. Note that in a similar manner to U.S. GAAP, paragraph 60 of IAS 33 states, "For contracts that may be settled in ordinary shares or cash at the holder's option, the more dilutive of cash settlement and share settlement shall be used in calculating diluted earnings per share." However, if the issuer has an option to settle in either cash or shares under U.S. GAAP, an entity must consider which settlement alternative (cash or shares) is more dilutive; under IFRSs, entities are required to presume share settlement.

Presentation of EPS for Extraordinary Items

Under U.S. GAAP, ASC 260-10-45-3 states, "[a]n entity that reports a discontinued operation or an extraordinary item in a period shall present basic and diluted per-share amounts for those line items either on the face of the income statement or in the notes to the financial statements" (emphasis added).

Under IFRSs, paragraphs 66 and 68 of IAS 33 indicate that an entity that reports discontinued operations must disclose on the face of its income statement or in the notes both basic and diluted EPS. However, under IFRSs entities are precluded from classifying items as extraordinary; thus, under IFRSs, paragraph 85 of IAS 1, Presentation of Financial Statements, entities are not permitted to present separately EPS for extraordinary items.

____________________

1 Differences are based on comparison of authoritative literature under U.S. GAAP and IFRSs and do not necessarily include interpretations of such literature.

2 IAS 33, like ASC 260, does include the two-class method; however, it is applied under IFRSs only when the share is an equity instrument.

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