Treasury Stock Method

Date recorded:

At the January 2006 meeting, the Board decided that the (amended) treasury stock method should also be used to calculate the dilutive effect of convertible instruments on EPS calculations. This would replace the 'if converted' method that is used for these instruments at present. The staff noted that the difference in treatment of convertible instruments between IFRSs (treasury stock method) and US GAAP (if converted method) would have significant effects on the calculation of diluted EPS. Using the treasury stock method proposed in the amendments to IAS 33, most convertible instruments would not be dilutive. Using the 'if converted' method, an instrument is dilutive when the dividend or interest on the instrument is lower than basic EPS. The staff were concerned about this effect, particularly in the context of the Convergence Agenda.

Board members noted that EPS was not part of the Convergence Agenda and, more importantly, that the Convergence Agenda accommodates differences in treatments in circumstances in which there are legacy differences in standards. In this case, IFRS bifurcates compound financial instruments; US GAAP does not. The majority of Board members thought that it was more important to fix the IASB's EPS standard for the vast majority of IFRS users rather than to accommodate the relatively few US Foreign Private Issuers that might report different EPS numbers under IFRS and US GAAP.

The IASB directed the staff to prepare amendments to IAS 33 utilising the treasury stock method. The Board agreed not to address the matter of the treatment of 'senior securities' in the EPS calculation at this time. The Board thought that it was more important to amend IAS 33 such that it was internally consistent than to attempt, in a 'quick fix' manner, to achieve convergence with US GAAP.

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