Earnings per Share - Treasury Stock Method
Amendments to IAS 33 Earnings Per Share have been considered by the International Accounting Standards Board as a result of its efforts to maintain convergence with the Financial Accounting Standards Board (FASB).
IAS 33 and the US equivalent, FASB Statement No. 128 Earnings per Share are substantially converged. IAS 33 and FASB Statement No. 128 currently use a method known as the treasury stock method for calculating the effects of dilutive options and warrants in the diluted earnings per share calculation.
In September 2005, the FASB published an Exposure Draft to amend the calculation of Earnings per Share under the treasury stock method in SFAS 128. The proposal would amend the treasury stock method to include as assumed proceeds the end-of-period carrying value of a liability that is assumed to be settled in shares and use the end-of-period market price in the computation of incremental shares. The IASB tentatively decided to amend IAS 33 to align the calculation of EPS under IAS 33 with the amendments proposed in the FASB Exposure Draft.
The FASB and the IASB decided subsequently to make the following changes to the proposal:
- a new method, known as the fair value method, be used for all instruments subject to the treasury stock method that can be settled in cash or shares, are classified as a liability and are measured at fair value with changes in fair value in profit or loss; and
- the fair value method be used for all instruments subject to the if-converted method that can be settled in cash or shares, are classified as a liability and are measured at fair value with changes in fair value recognised in profit or loss.
The IASB also decided to amend IAS 33:
- to require the two-class method for computing basic earnings per share for mandatorily convertible instruments with a stated participation right. Mandatorily convertible instruments without a stated participation right would be excluded from the calculation of basic earnings per share; and
- to include options and warrants with a nominal exercise price in the computation of basic earnings per share if (a) the instruments are currently exercisable or convertible into ordinary shares for little or no cost to the holder or (b) the option or warrant currently participates in earnings with ordinary shareholders.
Is this project part of the Memorandum of Understanding?
No. The MoU sets out a Roadmap of Convergence between IFRSs and US GAAP.
Click here for more information on the MoU.
Next due process step
An Exposure Draft reflecting the decisions to date is expected to be issued in the first quarter of 2008.
Due process steps completed
Stage 1: Setting the agenda
This project commenced in 2005 primarily as a response to the proposed amendment to FASB Statement No. 128.
Stage 2: Project Planning
This project is limited to amendments related to the Board’s decision to amend the treasury stock method in line with the proposed amendments to FASB Statement No. 128.
A working group has not been established as the scope of the project is limited.
Stage 3: Development and publication of a discussion paper
A discussion paper is not a mandatory step in the IASB Due Process Handbook. A discussion paper was not considered necessary for this project as the Exposure Draft process is expected to provide the most suitable opportunity for feedback on the proposals.
Estimated project completion
The current project plan envisages that a final Standard will be issued in 2008.
Further information:
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