Diluted EPS is computed by dividing income available to common stockholders, adjusted for the effects of the presumed issuance of potential common shares, by the number of (1) weighted average common shares outstanding, plus (2) potentially issuable shares, such as those that result from the conversion of a convertible instrument or exercise of a warrant.

In other words, diluted EPS is basic EPS adjusted for the hypothetical effect of potentially dilutive securities. Figure FSP 7-2 provides a summary of diluted EPS.

Figure FSP 7-2
Summary of diluted EPS

See FSP 7.5 for further discussion of diluted EPS.

EPS should be presented for income from continuing operations, if applicable, and for net income on the income statement. Reporting entities should present EPS for each class of common stock for all periods for which an income statement is presented.

Reporting entities with outstanding potential common stock should present diluted EPS for net income and income from continuing operations, if applicable, with equal prominence on the face of the income statement. If the reporting entity reports diluted EPS data in one period, it should report it for all periods presented, even if the amounts are the same as basic EPS. If basic and diluted EPS are the same amount for all periods, dual presentation can be accomplished in one line. If the reporting entity elects to present a single statement of comprehensive income, EPS should be presented after net income and before other comprehensive income (OCI). The presentation of basic and diluted EPS for a participating security, other than common stock, is not required but is not precluded.

In ASC 220-10-S99-5 (SAB Topic 6.B), the SEC staff requires that income or loss available to common stockholders be presented on the income statement when it is materially different from reported net income or loss. While ASC 220-10-S99-5 acknowledges that a materiality assessment consists of quantitative and qualitative factors, it highlights that for differences of less than 10%, the staff would generally not insist on disclosure on the income statement. See Figure FSP 7-3 for examples of adjustments which can create differences between net income and income available to common stockholders.

The terms "basic EPS" and "diluted EPS" are used in ASC 260 to identify EPS data to be presented. However, ASC 260-10-45-4 notes they are not required captions in the income statement; terms such as "earnings per common share" and "earnings per common share—assuming dilution," respectively, are acceptable alternatives.

A reporting entity that reports a discontinued operation should present basic and diluted EPS amounts for that line item either on the income statement or in the notes. However, if disclosure of these amounts in the notes is elected, basic and diluted EPS for continuing operations, and for net income, must still be presented on the income statement. ASC 260-10-55-49 illustrates the presentation of the captions on the income statement.

ASC 260-10-50-1 requires a reporting entity to disclose the following for each period for which an income statement is presented:

A reporting entity should provide a description of any subsequent event that occurs after the end of the most recent balance sheet, but before issuance of the financial statements, that will materially change the number of common shares or potential common shares outstanding. Examples of those events may include:

In certain SEC filings, there may be requirements to provide pro forma EPS for these and other events, as discussed in FSP 7.7.

If changes in common stock resulting from stock dividends or stock splits occur after the close of the period, but before the financial statements are issued, the computations of basic and diluted EPS shall be adjusted retroactively for all periods presented to reflect that change in capital structure. If per-share computations reflect such changes, that fact should be disclosed. In certain circumstances, pro forma EPS may be required as further discussed in FSP 7.6.1.

ASC 505, Equity, requires reporting entities to disclose participation rights on its outstanding securities (see ASC 505-10-50-3). After adoption of ASU 2020-06, in order to comply with the general disclosure requirements in ASC 505-10-50-3, an entity shall explain the pertinent rights and privileges of each outstanding instrument in accordance with ASC 505-10-50-13. See FSP 7.4.2 for details.