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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—after 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 calculating 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 computation of diluted earnings per share 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, or physical settlement in exchange for specified quantities of assets other than cash, 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 net cash or net share settlement (or net cash or physical settlement) should be included in the computation of diluted earnings per share using the reverse treasury stock method and share settlement must be assumed in accordance with ASC 260-10-45-45. 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.

ASC 260-10-45-45

The effect of potential share settlement shall be included in the diluted EPS calculation (if the effect is more dilutive) for an otherwise cash settleable instrument that contains a provision that requires or permits share settlement (regardless of whether the election is at the option of an entity or the holder, or the entity has a history or policy of cash settlement). An example of such a contract accounted for in accordance with this paragraph and paragraph 260-10-45-46 is a written call option that gives the holder a choice of settling in common stock or in cash. An election to share settle an instrument, for purposes of applying the guidance in this paragraph, does not include circumstances in which share settlement is contingent upon the occurrence of a specified event or circumstance (such as contingently issuable shares). In those circumstances (other than if the contingency is an entity’s own share price), the guidance on contingently issuable shares should first be applied, and, if the contingency would be considered met, then the guidance in this paragraph should be applied. Share-based payment arrangements that are payable in common stock or in cash at the election of either the entity or the grantee shall be accounted for pursuant to this paragraph and paragraph 260-10-45-46, unless the share-based payment arrangement is classified as a liability because of the requirements in paragraph 718-10-25-15 (see paragraph 260-10-45-45A for guidance for those instruments). If the payment of cash is required only upon the final liquidation of an entity, then the entity shall include the effect of potential share settlement in the diluted EPS calculation until the liquidation occurs.

Written put options—after 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 as 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 share settlement must be assumed as discussed in ASC 260-10-45-45. 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—after adoption of ASU 2020-06
Example FSP 7-14 illustrates the application of the reverse treasury stock method to written put options.
EXAMPLE FSP 7-14
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.
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