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Earnings per share (EPS) is the most common and most complex performance measurement that a publicly held company presents in its quarterly and annual reports. The accounting guidance for the calculation and reporting of EPS can be found in Accounting Standards Codification (ASC) 260, Earnings per Share, which provides for the calculation and presentation of the basic and diluted EPS, and ASC 780, Stock Compensation, which provides for certain unique characteristics of stock compensation that impact the EPS calculation.
ASC 260 defines EPS as the amount of income attributable to each share of common stock. Basic EPS is calculated by dividing net income by the weighted average of the number common stock shares outstanding during the period, whereas diluted EPS includes all dilutive potential common shares outstanding during the period in the calculation. Generally, unvested equity awards that companies have granted to their employees are not included in the calculation of basic EPS, even though such contingent awards are legally considered outstanding.
Nevertheless, in some cases, unvested equity awards may be considered participating securities and included in the calculation of basic EPS. The application of the two-class method, discussed later in this article, reflects the treatment of unvested RSUs as participating securities. But employee equity awards generally impact only the denominator of diluted EPS unless they are antidilutive (ASC 260-10-45-17). The determination of whether an award is dilutive must be made on a quarterly and year-to-date basis for each grant (not in aggregate). Diluted EPS, however, always results in an antidilutive per-share amount whenever an entity reports a loss from continuing operations or a loss from continuing operations available to common stockholders (i.e., after any preferred dividend deductions; see ASC 260-10-45-19). Therefore, an entity that reports losses to its common stock holders does not report any diluted EPS.
ASC 780 impacts both the EPS numerator (net income) as well as the denominator (the average number of shares outstanding). Stock compensation not only reduces the net income and income tax expense but also impacts the amount of proceeds in the treasury stock method calculation that determines the average number of shares outstanding.
Restricted Stock Units
Restricted stock units (RSU) are one of the potentially dilutive contingent common shares that may impact the calculation of EPS. Although...