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As noted in ASC 260-10-45-13, shares issuable for little to no consideration should be included in the number of outstanding shares used for basic EPS (and therefore diluted EPS, as well, as shares included in basic EPS are never removed from the calculation of diluted EPS). There is no guidance on what is considered "little to no" consideration, and whether this literature should be applied to unexercised warrants or options. In their proposed amendments to pre-Codification FAS 128 (the source of ASC 260) in 2008, the FASB proposed that warrants or options exercisable for little to no cost (sometimes referred to as “penny warrants”) be included in the denominator of basic EPS (and therefore diluted EPS) once there were no further vesting conditions or contingencies associated with them. The vesting conditions are relevant as future service is considered a form of “consideration.” While the proposed amendments were not issued, we believe that this is the most current thinking of the FASB and that equity-classified penny warrants should generally be included in the computation of basic EPS. Contingent shares are not included in basic EPS until the contingency is resolved. Determination of what is considered little to no consideration still requires judgment, and would typically be assessed at the issuance (or grant) date of the instrument in relation to the stock price at that time.
However, liability-classified penny warrants (e.g., puttable penny warrants) generally should not be included in the weighted average number of outstanding shares for basic EPS. Liability-classified penny warrants generally would only be considered in the calculation of diluted EPS, unless they are also considered participating securities.
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