Expand
Resize
Add to favorites
Contracts that require the reporting entity to repurchase its own stock (such as written put options and forward purchase contracts, other than physically-settled forward purchase contracts for a fixed number of shares accounted for pursuant to ASC 480-10-45-4; see FSP 7.4.3.6) are reflected in the computation of diluted EPS if their effect is dilutive.
Net cash or net share settled forward repurchase contracts—before adoption of ASU 2020-06
A reporting entity should not deduct the shares underlying a forward repurchase contract that allows or requires net cash or net share settlement from weighted average common shares outstanding for purposes of computing basic and diluted earnings per share. That treatment is only applicable to forward contracts that require the delivery of a fixed number of shares for a fixed amount of cash at settlement.
A forward repurchase contract that requires net cash settlement should not be included in the denominator of the diluted earnings per share computation because the contract does not allow for share settlement, nor should there be an adjustment to the numerator for the gain or loss recorded through earnings for the period. A forward repurchase contract that allows for net share settlement or gross physical settlement should be included in the computation of diluted earnings per share using the reverse treasury stock method described in ASC 260-10-45-35. A forward repurchase contract that allows for either net cash or net share settlement should be included in the computation of diluted earnings per share using the reverse treasury stock method and the guidance applicable to contracts that may be settled in cash or shares (see FSP 7.5.7.1A). In performing the reverse treasury stock method for these contracts, the gain or loss on the contract that was recorded through earnings for the period should be added to or deducted from the numerator. These contracts may be anti-dilutive and, in such cases, there would be no adjustment to earnings per share.

ASC 260-10-45-35

Contracts that require that the reporting entity repurchase its own stock, such as written put options and forward purchase contracts other than forward purchase contracts accounted for under paragraphs 480-10-30-3 through 30-5 and 480-10-35-3, shall be reflected in the computation of diluted EPS if the effect is dilutive. If those contracts are in the money during the reporting period (the exercise price is above the average market price for that period), the potential dilutive effect on EPS shall be computed using the reverse treasury stock method. Under that method:

  1. Issuance of sufficient common shares shall be assumed at the beginning of the period (at the average market price during the period) to raise enough proceeds to satisfy the contract.
  2. The proceeds from issuance shall be assumed to be used to satisfy the contract (that is, to buy back shares).
  3. The incremental shares (the difference between the number of shares assumed issued and the number of shares received from satisfying the contract) shall be included in the denominator of the diluted EPS computation.

Written put options—before adoption of ASU 2020-06
A written put option that is required to be net cash settled should not be included in the denominator of the diluted earnings per share computation because it does not allow for share settlement, nor should there be an adjustment to the numerator for the gain or loss recorded through earnings for the period. A written put option that is required to be settled in shares should be included in the computation of diluted earnings per share using the reverse treasury stock method described in ASC 260-10-45-35. A written put option that allows for net share or net cash settlement should also be included in the computation of diluted earnings per share using the reverse treasury stock method and the guidance applicable to contracts that may be settled in cash or shares (see FSP 7.5.7.1A). In performing the reverse treasury stock method for these contracts, the gain or loss on the contract that was recorded through earnings for the period should be added to or deducted from the numerator. These contracts may be anti-dilutive and, in such cases, there would be no adjustment to earnings per share
Application example—before adoption of ASU 2020-06
Example FSP 7-14A illustrates the application of the reverse treasury stock method to written put options.
EXAMPLE FSP 7-14A
Reverse treasury stock method
FSP Corp sells a put option that allows the investor to sell 100 shares to FSP Corp at an exercise price of $25; the average market price for the period is $20.
How should FSP Corp compute diluted EPS?
Analysis
The incremental number of shares to be included in diluted EPS is 25. This is computed as follows:
  • Assume 125 shares are issued at the beginning of the period to raise enough proceeds to satisfy the put option exercise price of $2,500 (100 shares at $25). Number of shares assumed to have been issued is calculated by dividing the required proceeds of $2,500 by the average market price of $20 per share for the period.
  • The $2,500 in proceeds from issuance of new shares is then used to satisfy the put on 100 shares.
  • The EPS computation should include 25 incremental shares—125 shares assumed to be issued less the 100 shares assumed to have been repurchased.
Expand

Welcome to Viewpoint, the new platform that replaces Inform. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory.

Your session has expired

Please use the button below to sign in again.
If this problem persists please contact support.

signin option menu option suggested option contentmouse option displaycontent option contentpage option relatedlink option prevandafter option trending option searchicon option search option feedback option end slide