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ASC 260-10-S99-2 notes that the EPS numerator should be adjusted for a redemption of preferred stock when the fair value of consideration paid upon redemption exceeds the carrying amount, net of its issuance costs, because the excess represents a return to preferred stockholders.
The calculation is as follows:
Fair value of consideration transferred
less
Carrying value, net of issuance costs
equals
Adjustment to numerator
When the consideration is less than the carrying amount, net of issuance costs, the reporting entity should add the difference to the EPS numerator. For example, this would apply when a redemption is effected at a discount to the carrying amount of the preferred security.
This guidance applies to redemptions of convertible preferred stock regardless of whether the embedded conversion feature is “in-the-money” or “out-of-the-money” at the time of redemption. Example FSP 7-2 illustrates the impact of a redemption of preferred stock on the computation of basic EPS.
EXAMPLE FSP 7-2

Impact of redemption of preferred stock on the calculation of basic EPS
On January 1, 20X6, FSP Corp issued perpetual preferred stock that is convertible in four years. The par value (and issuance price) of the convertible preferred stock is $1 million. The par value is equal to the fair value at the date of issuance.
On December 31, 20X7, FSP Corp paid shareholders $1.2 million in cash to redeem the preferred stock.
What is the impact of the redemption of the convertible preferred stock on the calculation of basic EPS?
Analysis
The difference between the fair value of the consideration transferred to preferred stockholders less the carrying value of the preferred stock would be treated as a “deemed dividend” to preferred shareholders and would result in a reduction to the numerator in the computation of basic EPS.
In this example, the reduction to the numerator in the computation of basic EPS is determined as follows:
Fair value of consideration transferred
$1,200,000
Less: Carrying value of preferred stock
(1,000,000)
Reduction in numerator related to “deemed dividend”
$200,000

If conditionally redeemable preferred shares, initially classified in mezzanine equity, are subsequently determined to be ASC 480 liabilities due to a change in facts (such as the exercise of a holder put feature), such shares would require reclassification from mezzanine equity to a liability. ASC 480-10-30-2 requires the issuer to measure the liability initially at fair value and reduce equity by the amount of the initial measurement, recognizing no gain or loss in the income statement. This reclassification of shares to a liability is akin to the redemption of such shares by the issuance of debt.
Similar to the accounting for the redemption of preferred shares in ASC 260-10-S99-2, if the fair value of the liability differs from the carrying amount of the preferred shares upon reclassification, the reporting entity should deduct the difference from, or add to, the numerator (i.e., as a deemed dividend or as a return from preferred stockholders).
ASC 810-10-40-2 provides guidance on the accounting for a redemption of a subsidiary's preferred stock, either directly by the subsidiary or by its parent, that is not classified as a liability in the parent's consolidated balance sheet. This type of transaction is treated in the parent's consolidated financial statements as an equity transaction and not recorded in the income statement. The related retained earnings charge or credit is reflected in EPS in the same manner described above.
While ASC 260-10-S99-2 states that the excess consideration requires an adjustment to the numerator, it does not address the treatment of the redemption of preferred stock of a subsidiary when that subsidiary's operations will be classified as a discontinued operation. We believe that, because the adjustment is directly associated with the subsidiary being discontinued, it should be attributed to discontinued operations in computing EPS. The impact of attributing the adjustment to discontinued operations could be meaningful because doing so would result in excluding this amount from the control number for purposes of determining whether potential common shares are dilutive or anti-dilutive in the computation of diluted EPS (see FSP 7.5.1).
Additionally, ASC 260-10-S99-2 indicates that in an induced conversion of preferred shares, the excess of the fair value of securities issued over the fair value of securities issuable pursuant to the original contractual conversion terms also represents a return to preferred stockholders and should reduce the numerator of EPS.
Lastly, as noted in FG 7.8.2, certain modifications of preferred stock can also result in an adjustment to the EPS numerator as a deemed dividend, based on the incremental fair value arising from the modification.
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