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A private company or subsidiary may use the proceeds of an IPO to pay a dividend to its promoters/owners or parent company. In some situations, the dividend may exceed earnings in the most recent year. In such a case, the reporting entity should include unaudited pro forma per share data (for the latest year and interim period only) on the face of the income statement, giving effect to the number of shares whose proceeds would be necessary to pay the portion of the dividend that exceeds the current year’s earnings.
The pro forma EPS requirement also applies to both of the following situations:
  • A dividend that is declared after the date of the latest balance sheet included in the registration statement if the dividend exceeds earnings for the previous twelve months
  • A planned (but not yet declared) dividend if the planned dividend exceeds earnings for the previous twelve months, even if the dividend will not be funded from the proceeds of the IPO (e.g., the dividends were/will be funded from the proceeds of a line of credit or cash on hand)
SEC FRM 3420.2 addresses the application of ASC 855-10-S99-1 (SAB Topic 1.B.3) when the dividend to be paid exceeds both the last twelve months' earnings and the proceeds from the equity offering. In that instance, the pro forma EPS computation should not reflect more shares than will be outstanding after the offering.
To present a transparent picture for the investor in this case, reporting entities should also adjust the numerator of the pro forma EPS computation to reflect the incremental interest expense (net of tax) relating to the portion of the dividend that exceeds both the gross proceeds from the equity offering and the previous 12 months’ earnings, which would be assumed to be funded by debt.

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