Earnings per Share - Treasury Stock Method
The IASB and the FASB have a joint project on the calculation of EPS. The project converges and simplifies the EPS calculation.
IAS 33 states that for calculating diluted EPS, an entity shall assume the exercise of diluted options, warrants and their equivalents. The assumed proceeds from these instruments are regarded as having been received from the issue of ordinary shares at the average market price of ordinary shares during the period. The difference between the number of ordinary shares issued and the number of ordinary shares that would have been issued at the average market price of ordinary shares during the period is treated as an issue of ordinary shares for no consideration. US GAAP has a similar requirement.
In September 2005, the FASB published an Exposure Draft to amend the calculation of diluted EPS. The proposal clarifies that the assumed proceeds from the exercise of options, warrants and their equivalents include the end-of-period carrying value of the liability that is assumed to be settled. The proposal would use the end-of-period market price, rather than the average market price, in the computation of incremental shares. At the November 2005 Board meeting, 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 IASB and the FASB decided subsequently to require for financial instruments measured at fair value through profit or loss that:
- profits or losses from changes in their fair value should remain in the numerator of diluted EPS; and
- the denominator of diluted EPS should not include incremental shares resulting from their assumed exercise or conversion.
In addition, the Board decided that neither basic nor diluted EPS should be adjusted for participating financial instruments that are measured at fair value through profit or loss.
Next due process step
We expect to publish an Exposure Draft in the third 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 focuses on amendments to the EPS calculation proposed in the FASB Exposure Draft. 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 2009.
Further information:
Click here to download the full project summary.