intermediate-kieso-ch16.ppt

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16-1

Volume 2Volume 2



16-2

C H A P T E RC H A P T E R 1616

DILUTIVE SECURITIES ANDDILUTIVE SECURITIES AND

EARNINGS PER SHAREEARNINGS PER SHARE

Intermediate Accounting

IFRS Edition

Kieso, Weygandt, and Warfield



16-3

1. Describe the accounting for the issuance, conversion, andretirement of convertible securities.

2. Explain the accounting for convertible preferred stock.

3. Contrast the accounting for share warrants and for share warrants

issued with other securities.

. Describe the accounting for share compensation plans.

!. Discuss the controvers" involving share compensation plans.

#. Compute earnings per share in a simple capital structure.

$. Compute earnings per share in a complex capital structure.

Learning !"e#$i%e&Learning !"e#$i%e&

Learning !"e#$i%e&Learning !"e#$i%e&



16-'

Debt and e%uit"Debt and e%uit"

Convertible debtConvertible debt

Convertible preference sharesConvertible preference shares

&hare warrants srt perintah, 'mn&hare warrants srt perintah, 'mn

(ccounting for share (ccounting for share

compensationcompensation

Dilu$i%e ( $am!a)an Se#uri$ie&Dilu$i%e ( $am!a)an Se#uri$ie&

an* Com+en&a$ion Plan&an* Com+en&a$ion Plan&Com+u$ing Earning& Per S)areCom+u$ing Earning& Per S)are

&imple capital structure&imple capital structure

Complex capital structureComplex capital structure

Dilu$i%e Se#uri$ie& an* Earning& Per S)areDilu$i%e Se#uri$ie& an* Earning& Per S)are

Dilu$i%e Se#uri$ie& an* Earning& Per S)areDilu$i%e Se#uri$ie& an* Earning& Per S)are



16-,

De!$ an* Eui$.De!$ an* Eui$.

De!$ an* Eui$.De!$ an* Eui$.

S)are +$ion&S)are +$ion&Con%er$i!leCon%er$i!le

Se#uri$ie&Se#uri$ie&Pre/eren#ePre/eren#e

S)are&S)are&

&hould companies report these instruments as a

lia!ili$. or eui$..



16-6

)at the holder*s option+

enefit of a ond )guaranteed interest and principal+

-rivilege hak istimewa of Exchanging it for &hares

onds which can be changed into other corporate

securities are called #on%er$i!le !on*&0

Con%er$i!le De!$Con%er$i!le De!$

Con%er$i!le De!$Con%er$i!le De!$

LO 1 Describe the accounting for the issuance, conversion,and retirement of convertible securities.



16-

Desire to raise e%uit" capital without giving up more

ownership control than necessar".

/btain common stock financing at cheaper rates.

0wo main reasons corporations issue convertibles

Con%er$i!le De!$Con%er$i!le De!$Con%er$i!le De!$Con%er$i!le De!$




16-



Convertible debt is accounted for as a #om+oun* in&$rumen$.

Companies use the 45i$)-an*-5i$)ou$ method to value

compound instruments.

A##oun$ing /or Con%er$i!le De!$

Illu&$ra$ion 16-1



16-7



Im+lemen$a$ion o/ $)e 5i$)-an*-5i$)ou$ a++roa#)

10 8ir&$, determine total fair value of convertible debt with both

liabilit" and e%uit" component.

20 Se#on*, determine liabilit" component b" computing net present

value of all contractual future cash flows discounted at the market

rate of interest.

30 8inall., subtract liabilit" component estimated in second step from

fair value of convertible debt )issue proceeds+ to arrive at the

e%uit" component.

A##oun$ing /or Con%er$i!le De!$



16-19

A$ Time o/ I&&uan#e



Illu&$ra$ion: oche roup )DE4+ issues 2,555 convertible

bonds at the beginning of 2511. 0he bonds have a four6"ear

term with a stated rate of interest of # percent, and are issuedat par with a face value of 71,555 per bond )the total proceeds

received from issuance of the bonds are 72,555,555+. 8nterest

is pa"able annuall" at December 31. Each bond is convertible

into 2!5 ordinar" shares with a par value of 71. 0he market rate

of interest on similar non6convertible debt is 9 percent.



16-11

A$ Time o/I&&uan#e


LO 1

Illu&$ra$ion 16-2

Illu&$ra$ion 16-3

Illu&$ra$ion 16-'



16-12

A$ Time o/ I&&uan#e


LO 1

Illu&$ra$ion 16-3

Illu&$ra$ion 16-'

Cash 2,555,555

onds -a"able 1,:5!,#5#

&hare -remium;Conversion E%uit" 19,39

;ournalEn$r.



16-13

Se$$lemen$ o/ Con%er$i!le <on*&



Repurchase at Maturity. 8f the bonds are not converted at

maturit", oche makes the following entr" to pa" off the

convertible debtholders.

onds -a"able 2,555,555

Cash 2,555,555

NTE: 0he amount originall" allocated to e%uit" of 719,3: either remains

in the &hare -remium;Conversion E%uit" account or is transferred to the

&hare -remium;/rdinar" account.



16-1'




Conversion of Bonds at Maturity. 8f the bonds are converted

at maturit", oche makes the following entr".



&hare Capital;/rdinar" !55,555

&hare -remium;/rdinar" 1,#9,39

NTE: 0he amount originall" allocated to e%uit" of 719,3: is transferred to

the &hare -remium;/rdinar" account.



16-1,




Conversion of Bonds before Maturity.

Illu&$ra$ion 16-,



16-16




Conversion of Bonds before Maturity. (ssuming that oche

converts its bonds into ordinar" shares on December 31, 2512.


onds -a"able 1,:9,1

&hare Capital;/rdinar" !55,555

&hare -remium;/rdinar" 1,!::,:3!

NTE: 0he amount originall" allocated to e%uit" of 719,3: is transferred to

the &hare -remium;/rdinar" account.



16-1




Repurchase before Maturity. oche determines the fair value

of the liabilit" component of the convertible bonds at December 31,

2512, and then subtracts the fair value of the convertible bond

issue )including the e%uit" component+. 0hen,

1. 0he difference between the consideration allocated to the

liabilit" component and the carr"ing amount of the liabilit" is

recogni<ed as a gain or loss, and

2. 0he amount of consideration relating to the e%uit" component is

recogni<ed )as a reduction+ in e%uit".



16-1




Repurchase before Maturity. (ssume

=air value of the convertible debt )including both liabilit" and

e%uit" components+, based on market prices at December 31,2512, is 71,9#!,555.

0he fair value of the liabilit" component is 71,95,955. 0his

amount is based on computing the present value of a non6

convertible bond with a two6"ear term )which corresponds to

the shortened time to maturit" of the repurchased bonds.+



16-17




8ir&$, determine the gain or loss on debt repurchase.Illu&$ra$ion 16-6

Illu&$ra$ion 16-

Ne=$, determine an" ad'ustment to the e%uit".



16-29

Illu&$ra$ion 16-6 > Se$$lemen$ (+en.l& o/ Con%er$i!le <on*&


LO 1

onds -a"able 1,:9,1&hare -remium;Conversion E%uit" #5,155

>oss on epurchase 15,!9

Cash 1,9#!,555

;ournalEn$r.



16-21

8ssuer wishes berkeinginan to encourage mendorong

prompt mempercepat conversion.

8ssuer offers tawaran additional consideration, called a

?sweetener.@

&weetener is an expense of the period.



In*u#e* Con%er&ion



16-22



In*u#e* Con%er&ionIllu&$ra$ion: Aelloid, 8nc. has outstanding B1,555,555 par value

convertible debentures convertible into 155,555 ordinar" shares

)B1 par value+. hen issued, Aelloid recorded &hare -remium

;Conversions E%uit" of B1!,555. Aelloid wishes to reduce its

annual interest cost. 0o do so, Aelloid agrees to pa" the holders

of its convertible debentures an additional B:5,555 if the" will

convert. (ssuming conversion occurs, Aelloid makes thefollowing entr".



16-23



In*u#e* Con%er&ionIllu&$ra$ion: Aelloid makes the following entr".

Conversion Expense #!,555

&hare -remium;Conversion E%uit" 1!,555


&hare Capital;/rdinar" 155,555

&hare -remium;/rdinar" 955,555Cash :5,555



16-2'

Convertible preference shares are reported as part ofeui$..

hen preference shares are #on%er$e* or

re+ur#)a&e*, there is no gain or loss recogni<ed.

Con%er$i!le Pre/eren#e S)are&Con%er$i!le Pre/eren#e S)are&Con%er$i!le Pre/eren#e S)are&Con%er$i!le Pre/eren#e S)are&

LO !"plain the accounting for convertible preference shares.

Con%er$i!le +re/eren#e &)are& include an option for theholder to convert preference shares into a fixed number of

ordinar" shares.



16-2,



Illu&$ra$ion: orse Compan" issues 1,555 convertiblepreference shares that have a par value of 71 per share. 0he

shares were issued at a price of 7255 per share. 0he 'ournal

entr" to record this transaction is as follows.

Cash )1,555 x 7255+ 255,555

&hare Capital;-reference )1,555 x 71+ 1,555




16-26



Illu&$ra$ion: 8f we assume that each share is subse%uentl"converted into 2! each ordinar" shares )72 par value+ that

have a fair value of 715,555, the 'ournal entr" to record the

conversion is as follows.

&hare Capital;-reference 1,555


&hare Capital;/rdinar" )1,555 x 2! x 72+ !5,555

&hare -remium;/rdinar" 1!5,555



16-2



Illu&$ra$ion: 8f the convertible preference shares arerepurchased instead of converted, orse makes the following

entr".

&hare Capital;-reference 1,555&hare -remium;Conversion E%uit" 199,555

etained Earnings 215,555

Cash 15,555

(n" excess paid above the book value of the convertible preference

shares is often debited to etained Earnings.



16-2

S)are ?arran$&S)are ?arran$&S)are ?arran$&S)are ?arran$&

LO # Contrast the accounting for share $arrants and forshare $arrants issued $ith other securities.

?arran$& are certificates entitling the holder to ac%uire sharesat a certain price within a stated period.

ormall" arises under three situations

1. 0o make the securit" more a$$ra#$i%e.2. Existing shareholders have a +reem+$i%e rig)$ to

purchase ordinar" shares.

3. 0o executives and emplo"ees as a form of

#om+en&a$ion.



16-27

S)are ?arran$& I&&ue* 5i$) $)er Se#uri$ie&


arrants issued with other securities are basicall" long6term

options to bu" ordinar" shares at a fixed price.

enerall", the life of warrants is five "ears, occasionall"15 "ears.

Compan" should use the with6and6without method to

allocate the proceeds between the two components.




16-39


Illu&$ra$ion: (t one time, (0F0 )4&(+ issued bonds withdetachable five6"ear warrants to bu" one ordinar" share )par

value B!+ at B2!. (t the time, an ordinar" share of (0F0 was

selling for approximatel" B!5. 0hese warrants enabled (0F0 to

price its bond offering at par with an :3G percent "ield )%uite a bitlower than prevailing rates at that time+. (0F0 was able to sell the

bonds plus the warrants for B15,255,555. 0o account for the

proceeds from this sale, (0F0 uses the with6and6without method.

4sing this approach, (0F0 determines the present value of the

future cash flows related to the bonds, which is B9,$5$,:!2.




16-31


Illu&$ra$ion: 4sing this approach, (0F0 determines the presentvalue of the future cash flows related to the bonds, which is

B9,$5$,:!2.

LO #

Illu&$ra$ion 16-

HournalEntr"

Cash 9,$5$,:!2

onds -a"able 9,$5$,:!2Cash 92,1:

&hare -remium6&hare arrants 92,1:



16-32


Illu&$ra$ion: (ssuming investors exercise all 15,555 warrants)one warrant per one ordinar" share+, (0F0 makes the following

entr".

Cash )15,555 x B2!+ 2!5,555

&hare -remium;&hare arrants 92,1:

&hare Capital;/rdinar" )15,555 x B!+ !5,555

&hare -remium;/rdinar" #92,1:

hat if investors fail to exercise the warrantsI




16-33

Rig)$& $o Su!&#ri!e $o A**i$ional S)are&


S)are Rig)$& 6 existing stockholders have the right

)preemptive privilege+ to purchase newl" issued shares in

proportion to their holdings. -rice is normall" less than current market value.

Companies make onl" a memorandum entr".




16-3'

S)are +$ion 6 gives ke" emplo"ees option to purchase

ordinar" shares at a given price over extended period of time.

Effective compensation programs are ones that

1. base compensation on performance

2. motivate emplo"ees,

3.

help retain executives and recruit new talent,. maximi<e emplo"ee*s after6tax benefit, and

!. use performance criteria over which emplo"ee has control.

S)are Com+en&a$ion Plan&





16-3,

T)e @a"or Re+or$ing I&&ue

ew IAS< guidelines re%uires companies to recogni<e

compensation cost using the fair6value method.

4nder the /air-%alue me$)o*, companies use acceptable

option6pricing models to value the options at the date of

grant.





16-36

T5o main a##oun$ing i&&ue&:

1. Aow to determine compensation expense.

2. /ver what periods to allocate compensation

expense.

LO % Describe the accounting for share compensation plans.

A##oun$ing /or S)are Com+en&a$ionA##oun$ing /or S)are Com+en&a$ionA##oun$ing /or S)are Com+en&a$ionA##oun$ing /or S)are Com+en&a$ion

S)are +$ion Plan&



16-3

De$ermining E=+en&e Compensation expense based on the fair value of

the options expected to vest on the date the options

are granted to the emplo"ee)s+ )i.e., the grant date+.

Allo#a$ing Com+en&a$ion E=+en&e

/ver the periods in which emplo"ees perform the

service;the service period.





16-3 LO % Describe the accounting for share compensation plans.

Illu&$ra$ion: /n ovember 1, 2515, the shareholders of ChenCompan" approve a plan that grants the compan"*s five

executives options to purchase 2,555 shares each of the

compan"*s J155 par value ordinar" shares. 0he compan" grants

the options on Hanuar" 1, 2511. 0he executives ma" exercise the

options at an" time within the next 15 "ears. 0he option price per

share is J#,555, and the market price of the shares at the date of

grant is J$,555 per share. 4nder the fair value method, the

compan" computes total compensation expense b" appl"ing an

acceptable fair value option6pricing model. 0he fair value option6

pricing model determines Chen*s total compensation expense to

be J22,555,555.




16-37 LO % Describe the accounting for share compensation plans.

Illu&$ra$ion: (ssume that the expected period of benefit is two"ears, starting with the grant date. Chen would record the

transactions related to this option contract as follows.

Compensation Expense 11,555,555

&hare -remium;&hare /ptions 11,555,555

De#0 31 2911

)J22,555,555 x 2+

**

**

Compensation Expense 11,555,555

&hare -remium;&hare /ptions 11,555,555

De#0 31 2912




16-'9 LO % Describe the accounting for share compensation plans.

!"ercise. 8f Chen*s executives exercise 2,555 of the 15,555options )25 percent of the options+ on Hune 1, 251 )three "ears

and five months after date of grant+, the compan" records the

following 'ournal entr".

Cash )2,555 x J#,555+ 12,555,555

&hare -remium;&hare /ptions ,55,555

&hare Capital;/rdinar" )2,555 x J155+ 255,555

&hare -remium;/rdinar" 1#,255,555

;une 1 291'





!"piration. 8f Chen*s executives fail to exercise the remainingshare options before their expiration date, the compan" records

the following at the date of expiration.

&hare -remium;&hare /ptions 1$,#55,555

&hare -remium;Expired &hare /ptions 1$,#55,555

;an0 1 2921

)J22,555,555 x :5K+**

**





&d'ustment. /nce the total compensation is measured at thedate of grant, can it be changed in future periodsI

Depends on whether the ad'ustment is caused b" a

&er%i#e or marBe$ #on*i$ion.




16-'3

Re&$ri#$e* S$o#B0ransfer shares of stock to emplo"ees, sub'ect to an

agreement that the shares cannot be sold, transferred, or

pledged until vesting occurs.

@a"or A*%an$age&

1. ever becomes completel" worthless.

2. enerall" results in less dilution to existing stockholders.

3. etter aligns emplo"ee incentives with compan" incentives.





16-''


Illu&$ra$ion: /n Hanuar" 1, 2511, /gden Compan" issues 1,555shares of re&$ri#$e* &$o#B to its CE/, Christie Deeorge. /gden*s

stock has a fair value of B25 per share on Hanuar" 1, 2511.

(dditional information is as follows.

1. 0he service period related to the restricted stock is five "ears.

2. Lesting occurs if Deeorge sta"s with the compan" for a five6

"ear period.

3. 0he par value of the stock is B1 per share.

/gden makes the following entr" on the grant date )Hanuar" 1,

2511+.




16-',


4nearned Compensation 25,555

&hare Capital66/rdinar" )1,555 x B1+ 1,555

&hare -remium66/rdinar" )1,555 x B19+ 19,555

Unearne* Com+en&a$ion re+re&en$& $)e #o&$ o/ &er%i#e& .e$ $o !e

+er/orme* 5)i#) i& no$ an a&&e$0 4nearned Compensation is reported

as a component of stockholders* e%uit" in the balance sheet.

Illu&$ra$ion: /gden makes the following entr" on the grant date)Hanuar" 1, 2511+.




16-'6


Compensation expense ,555

4nearned compensation,555

/gden records compensation expense of B,555 for each of thenext four "ears )2511, 2512, 2513, and 251+.

Illu&$ra$ion: ecord the 'ournal entr" at December 31, 2511,/gden records compensation expense.




16-'


&hare Capital66/rdinar" 1,555

&hare -remium66/rdinar" 19,555

Compensation Expense )B,555 x 2+ :,555

4nearned Compensation 12,555

Illu&$ra$ion: (ssume that Deeorge leaves on =ebruar" 3, 2513)before an" expense has been recorded during 2513+. 0he entr" to

record this forfeiture is as follows




16-'

Em+lo.ee S$o#B-Pur#)a&e Plan& ESPP& enerall" permit all emplo"ees to +ur#)a&e &$o#B a$ a

*i&#oun$e* +ri#e for a short period of time.

Considered compensator" and should be recorded ase=+en&e over the service period.





16-'7


Illu&$ra$ion: asthead Compan" offers all its 1,555 emplo"ees theopportunit" to participate in an emplo"ee share6purchase plan.

4nder the terms of the plan, the emplo"ees are entitled to purchase

155 ordinar" shares )par value M1 per share+ at a 25 percent

discount. 0he purchase price must be paid immediatel" uponacceptance of the offer. 8n total, :55 emplo"ees accept the offer,

and each emplo"ee purchases on average :5 shares. 0hat is, the

emplo"ees purchase a total of #,555 shares. 0he weighted6

average market price of the shares at the purchase date is M35 pershare, and the weighted6average purchase price is M2 per share.

0he entr" to record this transaction is as follows.




16-,9


Illu&$ra$ion: 0he entr" to record this transaction is as follows.

Cash )#,555 x M2+ 1,!3#,555

Compensation Expense N#,555 x )M35 6 M2+O 3:,555

&hare Capital;/rdinar" )#,555 x M1+ #,555

&hare -remium;/rdinar" 1,:!#,555

0he 8(& indicates that there is no rea&on to treat broad6based emplo"ee

share plans differentl" from other emplo"ee share plans.




16-,1

Di&#lo&ure o/ Com+en&a$ion Plan&


Compan" with one or more share6based pa"ment arrangements

must disclose

1. ature and extent of share6based pa"ment arrangements

that existed during the period.

2. Aow the fair value of the goods and services received, or the

fair value of the e%uit" instruments granted during the

period, was determined.

3. Effect of share6based pa"ment transactions on the

compan"*s net income )loss+ during the period and on its

financial position.




16-,2

De!a$e o%er S$o#B +$ion A##oun$ing0he 8(& faced considerable opposition when it proposed the fair

value method for accounting for share options. 0his is not

surprising, given that the fair value method results in greater

compensation costs relative to the intrinsic6value model.

0ransparent financial reporting;including recognition of share6

based expense;should not be critici<ed because companies will

report lower income.

8f we write standards to achieve some social, economic, or public

polic" goal, financial reporting loses its credibilit".

LO ( Discuss the controversy involving share compensation plans.




16-,3

Earning& +er &)are indicates the income earned b" each ordinar"

share.

Companies report earnings per share onl" for ordinar"

shares.

hen the income statement contains discontinuedoperations, companies are re%uired to report earnings per

share from continuing operations and net income on the face

of the income statement.

Com+u$ing Earning& Per S)areCom+u$ing Earning& Per S)areCom+u$ing Earning& Per S)areCom+u$ing Earning& Per S)are

Illu&$ra$ion 16-12



16-,' LO ) Compute earnings per share in a simple capital structure.

Sim+le S$ru#$ure66/nl" ordinar" sharesP nopotentiall" dilutive securities.

Com+le= S$ru#$ure66-otentiall" dilutive securities are

present.

4Dilu$i%e means the abilit" to influence the E-& in a

downward direction.

EPS Sim+le Ca+i$al S$ru#$ureEPS Sim+le Ca+i$al S$ru#$ureEPS Sim+le Ca+i$al S$ru#$ureEPS Sim+le Ca+i$al S$ru#$ure



16-,, LO ) Compute earnings per share in a simple capital structure.

Pre/erre* S$o#B Di%i*en*&&ubtracts the current6"ear preference share dividend from

net income to arrive at income available to ordinar"

shareholders.Illu&$ra$ion 16-13

-reference dividends are subtracted on cumulative

preference shares, whether declared or not.




16-,6 LO ) Compute earnings per share in a simple capital structure.

?eig)$e*-A%erage Num!er o/ S)are&Companies must weight the shares b" the fraction of the

period the" are outstanding.

hen share dividends or share splits occur, companiesneed to restate the shares outstanding before the share

dividend or split.




16-, LO ) Compute earnings per share in a simple capital structure.

Illu&$ra$ion: &abrina Compan" has the following changes in its

ordinar" shares during the "ear.Illu&$ra$ion 16-16

Compute the weighted6average number of shares outstanding

for &abrina Compan".




16-, LO ) Compute earnings per share in a simple capital structure.

Illu&$ra$ion16-16

Illu&$ra$ion 16-1




16-,7 LO * Compute earnings per share in a comple" capital structure.

Com+le= Ca+i$al S$ru#$ure exists when a business has

convertible securities,

options, warrants, or other rights

that upon conversion or exercise could *ilu$e earnings per

share.

Compan" reports both basic and diluted earnings per

share.

EPS Com+le= Ca+i$al S$ru#$ureEPS Com+le= Ca+i$al S$ru#$ureEPS Com+le= Ca+i$al S$ru#$ureEPS Com+le= Ca+i$al S$ru#$ure



16-69 LO * Compute earnings per share in a comple" capital structure.

Diluted E-& includes the effect of all potential dilutive ordinar"shares that were outstanding during the period.

Companies will not report diluted E-& if the securities in their capital

structure are an$i*ilu$i%e.

Illu&$ra$ion 16-22




16-61

Dilu$e* EPS Con%er$i!le Se#uri$ie&easure the dilutive effects of potential conversion on

E-& using the i/-#on%er$e* me$)o*.

0his method for a convertible bond assumes

)1+ the conversion at the beginning of the period )or at the

time of issuance of the securit", if issued during the

period+, and

)2+ the elimination of related interest, net of tax.

LO * Compute earnings per share in a comple" capital structure.





Illu&$ra$ion: a"field Corporation has net income of B215,555 forthe "ear and a weighted6average number of ordinar" shares

outstanding during the period of 155,555 shares. 0he compan" has

two convertible debenture bond issues outstanding. /ne is a #

percent issue sold at 155 )total B1,555,555+ in a prior "ear and

convertible into 25,555 ordinar" shares. 8nterest expense for the

current "ear related to the liabilit" component of this convertible

bond is B#2,555. 0he other is a $ percent issue sold at 155 )total

B1,555,555+ on (pril 1 of the current "ear and convertible into

32,555 ordinar" shares. 8nterest expense for the current "ear

related to the liabilit" component of this convertible bond is B:5,555.

0he tax rate is 5 percent.





Ne$ in#ome F 219999

?eig)$e*-a%erage &)are& F 199999

FF 20192019

<a&i# EPS




16-6' LO * Compute earnings per share in a comple" capital structure.

hen calculating Dilu$e* E-&, begin with <a&i& E-&.

219999

199999

FF

62999 = 1 - 0'9

29999

<a&i# EPSF 2019 Effect on E-&

Q 106

9999 = 1 - 0'9 = 7(12

2'999

Effect on E-& Q 10,9

Dilu$e* EPS F 107

6De!en$ure&

De!en$ure&

<a&i#EPS




16-6,

Dilu$e* EPS Con%er$i!le Se#uri$ie&$)er 8a#$or&


0he #on%er&ion ra$e on a *ilu$i%e &e#uri$. ma. #)ange during

the period in which the securit" is outstanding. 8n this situation,the compan" uses the most dilutive conversion rate available.

=or Con%er$i!le Pre/eren#e S)are& the compan" does not

subtract preference dividends from net income in computing the

numerator. h" notI ecause for purposes of computing E-&, itassumes conversion of the convertible preference shares to

outstanding ordinar" shares.





E16-26 EPS 5i$) Pre/eren#e S)are& /n Hanuar" 1,2515, >indse" Compan" issued B1,555,555 of #K

cumulative convertible preference shares were issued

instead of the bonds. Each B155 preference share is

convertible into ! ordinar" shares of >indse". >indse"*s netincome in 2511 was B25,555, and its tax rate was 5K. 0he

compan" had 155,555 ordinar" shares outstanding

throughout 2515.

In&$ru#$ion&: Compute diluted earnings per share for 2515.





E16-26 )a+ Compute diluted earnings per share for 2515.


Ne$ in#ome 2'9999 P/*0 Di%0 69999

?eig)$e*-a%erage &)are& F 199999FF 109109

<a&i# EPS

RR B1,555,555 x #K Q B#5,555 dividendB1,555,555 x #K Q B#5,555 dividend






199999FF

10691069

Dilu$e* EPS

69999

asic E-& Q 1.:5

FF

Effect onE-& Q 1.25

E16-26 )a+ Compute diluted earnings per share for 2515.

2'9999 69999

,9999

2'9999

1,9999

RR)15,555 x !+)15,555 x !+





199999FF

109109

Dilu$e* EPS

69999

asic E-& Q 1.:5

FF

Effect onE-& Q 2.55

E16-26 %aria$ion: (ssume each share of preferred isconvertible into 3 shares of common stock.

2'9999 69999

39999

19999

199999

RR)15,555 x 3+)15,555 x 3+

An$i*ilu$i%e

<a&i# F Dilu$e* EPS




16-9

Dilu$e* EPS +$ion& an* ?arran$&easure the dilutive effects of potential conversion using

the $rea&ur.-&)are me$)o*.

0his method assumes

)1+ compan" exercises the options or warrants at the

beginning of the "ear )or date of issue if later+, and

)2+ that it uses those proceeds to purchase ordinar"

shares for the treasur".





16-1

Illu&$ra$ion: Subit< 8ndustries, 8nc. has net income for theperiod of B225,555. 0he average number of shares

outstanding for the period was 155,555 shares. Aence,

basic E-&;ignoring all dilutive securities;is B2.25. 0he

average number of shares related to options outstanding)although not exercisable at this time+, at an option price of

B25 per share, is !,555 shares. 0he average market price

of the ordinar" shares during the "ear was B2:.

Compute E-& using the treasur"6share method.






Illu&$ra$ion 16-2


EPS C l C i l S



16-3

Con$ingen$ I&&ue Agreemen$Contingent shares are issued as a result of the

1. passage of time or

2. attainment of a certain earnings or market price level.


An$i*ilu$ion Re%i&i$e*

8gnore antidilutive securities in all calculations and incomputing diluted earnings per share.


EPS C l C i$ l S$ $



16-'

EPS Pre&en$a$ion an* Di&#lo&ure ( compan" should show per share amounts for

8ncome from continuing operations,

Discontinued operations, and

et income.

-er share amounts for a discontinued operation should be

presented on the face of the income statement or in the notes.



S / EPS C iS / EPS C $ $i



16-, LO * Compute earnings per share in a comple" capital structure.

Summar. o/ EPS Com+u$a$ionSummar. o/ EPS Com+u$a$ionSummar. o/ EPS Com+u$a$ionSummar. o/ EPS Com+u$a$ion

Illu&$ra$ion 16-32

Ill $ $i 16 33



16-6 LO *

Illu&$ra$ion 16-33

Summar. o/ EPSSummar. o/ EPS

Com+u$a$ionCom+u$a$ion

Summar. o/ EPSSummar. o/ EPS

Com+u$a$ionCom+u$a$ion



16-

4nder 4.&. ((-, all of the proceeds of convertible debt are recorded

as long6term debt unless settlement is in cash. 4nder 8=&, convertiblebonds are ?split@;separated into the e%uit" component )the value of the

conversion option+ of the bond issue and the debt component.

oth 4.&. ((- and 8=& follow the same model for recogni<ing

share6based compensation 0he fair value of shares and options

awarded to emplo"ees is recogni<ed over the period to which the

emplo"ees* services relate



16-

(lthough the calculation of basic and diluted earnings per share is

similar between 4.&. ((- and 8=&, the oards are working toresolve the few minor differences in E-& reporting. /ne proposal in the

=(& pro'ect concerns contracts that can be settled in either cash or

shares. 8=& re%uires that share settlement must be used, while 4.&.

((- gives companies a choice. 0he =(& pro'ect proposes adopting

the 8=& approach, thus converging 4.&. ((- and 8=& in thisregard.



16-7

elated to emplo"ee share6purchase plans, under 8=& all emplo"ee

purchase plans are deemed to be compensator"P that is, compensationexpense is recorded for the amount of the discount. 4nder 4.&. ((-,

these plans are often considered non6compensator" and therefore no

compensation is recorded. Certain conditions must exist before a plan

can be considered non6compensator";the most important being that

the discount generall" cannot exceed !K.

odification of a share option results in the recognition of an"

incremental fair value under both 8=& and 4.&. ((-. Aowever, if the

modification leads to a reduction, 8=& does not permit the reduction

but 4.&. ((- does



16-9

S$o#B-A++re#ia$ion Rig)$& SAR&

0he compan" gives an executive the right to receive

compensation e%ual to the share appreciation.

S)are a++re#ia$ion is the excess of the market price of the

stock at the date of exercise over a pre6established price. 0he compan" ma" pa" the share appreciation in cash, shares,

or a combination of both.

0he accounting for stock6appreciation rights depends on

whether the compan" classifies the rights as e%uit" or as a

liabilit".

LO + !"plain the accounting for shareappreciation rights plans.LO + !"plain the accounting for shareappreciation rights plans.



16-1 LO + !"plain the accounting for shareappreciation rights plans.LO + !"plain the accounting for shareappreciation rights plans.

SARSJ S)are-<a&e* Eui$. A5ar*&

Companies classif" &(s as e%uit" awards if at the date of exercise,

the holder receives shares of stock from the compan" upon exercise.

Aolder receives shares in an amount e%ual to the share6price

appreciation )the difference between the market price and the

pre6established price+.

(t the date of grant, the compan" determines a fair value for the

&( and then allocates this amount to compensation expense

over the service period of the emplo"ees.



16-2

SARSJ S)are-<a&e* Lia!ili$. A5ar*&

Companies classif" &(s as liabilit" awards if at the date of exercise,

the holder receives a cash pa"ment. (ccounting

1. easure the fair value of the award at the grant date and accrue

compensation over the service period.

2. emeasure the fair value each reporting period, until the award is

settledP ad'ust the compensation cost each period for changes in fair

value pro6rated for the portion of the service period completed.

3. /nce the service period is completed, determine compensation expenseeach subse%uent period b" reporting the full change in market price as

an ad'ustment to compensation expense.




16-3

Illu&$ra$ion: ra<il Aotels, 8nc. establishes a share6

appreciation rights plan on Hanuar" 1, 2511. 0he plan entitles

executives to receive cash at the date of exercise for the

difference between the market price of the stock and the pre6

established price of B15 on 15,555 &(s. 0he fair value of the&(s on December 31, 2511, is B3, and the service period

runs for two "ears )2511T2512+.

8llustration 1#(61 indicates the amount of compensation

expense to be recorded each period.




16-'

Illu&$ra$ion 16-A1

ra<il Aotels records compensation expense in the first "ear as

follows.

Compensation Expense 1!,555

>iabilit" under &hare6(ppreciation -lan 1!,555




16-,

8n 2512, when it records negative compensation expense, ra<il

would debit the account for B25,555. 0he entr" to record the

negative compensation expense is as follows.

>iabilit" under &hare6(ppreciation -lan 25,555

Compensation Expense 25,555

(t December 31, 2513, the executives receive B!5,555. ra<il would

remove the liabilit" with the following entr".

>iabilit" under &hare6(ppreciation -lan !5,555

Cash !5,555




16-6 LO - Compute earnings per share in a comple" situation.LO - Compute earnings per share in a comple" situation.

Illu&$ra$ion 16-<1

alance &heet for Comprehensive 8llustration



16-

Illu&$ra$ion 16-<1

LO - Compute earnings per share in a comple" situation.LO - Compute earnings per share in a comple" situation.

alance &heet for Comprehensive 8llustration



16-

Illu&$ra$ion 16-<2

Computation of Earnings per &hare;&imple Capital &tructure




16-7

Dilu$e* Earning& Per S)are

S$e+& /or #om+u$ing *ilu$e* earning& +er &)are:

1. Determine, for each dilutive securit", the per share effect

assuming exerciseconversion.

2. ank the results from step 1 from smallest to largest earningseffect per share.

3. eginning with the earnings per share based upon the weighted6

average of ordinar" shares outstanding, recalculate earnings per

share b" adding the smallest per share effects from step 2.Continue this process so long as each recalculated earnings per

share is smaller than the previous amount.




16-79

0he /ir&$ &$e+ is to determine a per share effect for each

potentiall" dilutive securit".

-er &hare Effect of /ptions Trea&ur.-S)are @e$)o*, Diluted

Earnings per &hareIllu&$ra$ion 16-<3




16-71



-er &hare Effect of :K onds I/-Con%er$e* @e$)o*, Diluted

Earnings per &hareIllu&$ra$ion 16-<'




16-72



-er &hare Effect of 15K onds I/-Con%er$e* @e$)o*, Diluted

Earnings per &hareIllu&$ra$ion 16-<,




16-73



-er &hare Effect of 15K Convertible -reference &hares I/-Con%er$e*

@e$)o*, Diluted Earnings per &hareIllu&$ra$ion 16-<6




16-7'



anking of per &hare Effects Smalle&$ $o Large&$, Diluted Earnings

per &hare

Illu&$ra$ion 16-<




16-7,

0he ne=$ &$e+ is to determine earnings per share giving effect

to the ranking

ecomputation of E-& 4sing 8ncremental Effect of /ptions

Illu&$ra$ion 16-<


0he effect of the options is *ilu$i%e.



16-76


to the ranking

ecomputation of E-& 4sing 8ncremental Effect of :K Convertible

ondsIllu&$ra$ion 16-<7


0he effect of the :K convertible bonds is *ilu$i%e.



16-7


to the ranking

ecomputation of E-& 4sing 8ncremental Effect of 15K Convertible

ondsIllu&$ra$ion 16-<19


0he effect of the 15K convertible bonds is *ilu$i%e.



16-7


to the ranking

ecomputation of E-& 4sing 8ncremental Effect of 15K Convertible

-reference &haresIllu&$ra$ion 16-<11


0he effect of the 15K convertible preference shares is NT *ilu$i%e.



16-77

8inall., ebster Corporation*s disclosure of earnings per

share on its income statement.

Illu&$ra$ion 16-<12


0he effect of the 15K convertible preference shares is NT *ilu$i%e.



16-199

(ssume that arton Compan" provides the following information.

Illu&$ra$ion 16-<13


artonCompan"Data

asic andDiluted E-&

Illu&$ra$ion 16-<1'

Illu&$ra$ion 16-<1'

Co+.rig)$Co+.rig)$

Co+.rig)$Co+.rig)$



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intermediate-kieso-ch16.ppt

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