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Short-term Convergence: Earnings per Share

Date recorded:

The Board discussed the way forward in this project and some sweep issues that arose during the drafting of the exposure draft (the ED).

Fair Value Method

The IASB and FASB tentatively decided that instruments that can be settled in cash or shares and are measured at fair value through profit or loss should not be adjusted for calculating basic and diluted EPS calculation (referred to as the 'fair value method'). The main reason for this decision was that the changes in fair value recognised in profit or loss reflect the economic effect of these instruments on current shareholders. It was noted that this rationale applies even though the inclusion of a financial liability measured at fair value through profit or loss in computing the incremental shares under the modified treasury stock method would result in EPS being anti-dilutive. In addition, the Board noted that excluding these instruments from the calculation satisfies the objective of simplifying the EPS calculation.

There was support from the Board for finalising the fair value method though one Board member noted that this approach was removing information about the number of shares that would be issued upon conversion of these instruments. Therefore, this Board member suggested requiring additional disclosure in order to enable users to calculate diluted EPS differently from the method required in the ED. The disclosure requirements discussed in this context were

  • to disclose the number of incremental shares that would have been added to the denominator of diluted EPS (that is, as if the instrument was classified as equity and the treasury stock method was applied) and
  • to disclose the fair value of the instruments excluded from diluted EPS under the fair value method to demonstrate how much value was assigned to the potential equity shares.

The Board decided not to include additional disclosure requirements but to include a question in the ED to seek input from constituents whether:

  • They agree with the basis for excluding instruments that are measured at fair value through profit or loss from the EPS calculation, that is, no further adjustment to earnings or the potential number of shares is required.
  • Additional information should be provided in a disclosure for these instruments and why.

Basic EPS: Two-class method

The Board also agreed that the two-class method should be applied to all participating securities regardless of whether they are classified as liabilities or equity and that the calculation of basic EPS should only include those shares that are either currently exercisable or convertible for little or no cost or can currently participate in earnings with ordinary shareholders.

Share-based payment awards under IFRS 2 Share-based Payment

The Board decided to clarify that a financial instrument or contract subject to IFRS 2 that is recognised (or would be recognised upon satisfaction of a performance or service condition) as a liability and measured in accordance the fair-value-based measurement approach in IFRS 2 would be considered to be recognised at fair value for purposes of applying the ED.

Way forward

The Board reaffirmed the other tentative decisions made in this project and asked the staff to draft the ED taking into account the decisions made at this meeting.

One Board member indicated an intention to dissent to the ED because of concerns about determining dilution for written puts and forward purchase arrangements as well concerns regarding the lack of disclosure. Another Board member may dissent because of a fundamental concern in issuing a standard on EPS.

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