Intermediate Accounting Seventeenth Edition Kieso ● Weygandt ● Warfield Chapter 16 Dilutive Securities and Earnings per Share This slide deck contains animations Please disable animations if they cause issues with your device Learning Objectives After studying this chapter, you should be able to: Describe the accounting for the issuance, conversion, and retirement of convertible securities Contrast the accounting for stock warrants and for stock warrants issued with other securities Describe the accounting and reporting for stock compensation plans Compute basic earnings per share Compute diluted earnings per share Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 16 Dilutive Securities and Earnings Per Share Dilutive Securities • Debt and equity • Convertible debt • Convertible preferred stock Stock Warrants • Warrants and other securities Stock rights Copyright â2019 John Wiley & Sons, Inc Preview of Chapter 16 Stock Compensation Plans • Measurement • Recognition • Restricted stock • Employee stock-purchase plans • Disclosure of compensation plans Basic Earnings Per Share • Simple structure • Comprehensive example Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 16 Diluted Earnings Per Share • Convertible securities • Options and warrants • Contingent issues Antidilution Presentation and disclosure Copyright â2019 John Wiley & Sons, Inc Learning Objective Describe the Accounting for the Issuance, Conversion, and Retirement of Convertible Securities LO Copyright ©2019 John Wiley & Sons, Inc Dilutive Securities Debt and Equity Should companies report these financial instruments as a liability or equity Stock Options LO Convertible Securities Copyright ©2019 John Wiley & Sons, Inc Preferred Stock Dilutive Securities Accounting for Convertible Debt Convertible bonds can be changed into other corporate securities during some specified period of time after issuance LO Copyright ©2019 John Wiley & Sons, Inc Accounting for Convertible Debt Two main reasons corporations issue convertibles: To raise equity capital without giving up more ownership control than necessary Obtain debt financing at cheaper rates The accounting for convertible debt involves reporting issues at the time of (1) issuance, (2) conversion, and (3) retirement LO Copyright ©2019 John Wiley & Sons, Inc Accounting for Convertible Debt At Time of Issuance Recording convertible bonds follows the method used to record straight debt issues, with any discount or premium amortized over the term of the debt Global View IFRS requires that the issuer of convertible debt record the liability and equity components separately LO Copyright ©2019 John Wiley & Sons, Inc 10 Diluted Earnings per Share Per Share Effect of 7% Convertible Preferred (IfConverted Method), Diluted Earnings per Share LO Copyright ©2019 John Wiley & Sons, Inc 106 Diluted Earnings per Share Ranking of per Share Effects (Smallest to Largest), Diluted Earnings per Share Options 8% convertible bonds 10% convertible bonds 10% convertible preferred LO Effect per Share $0 1.60 2.00 3.50 Copyright ©2019 John Wiley & Sons, Inc 107 Diluted Earnings per Share Recomputation of EPS Using Incremental Effect of Options The next step is to determine earnings per share giving effect to the ranking LO Copyright ©2019 John Wiley & Sons, Inc 108 Diluted Earnings per Share Recomputation of EPS Using Incremental Effect of 8% Convertible Bonds LO Copyright ©2019 John Wiley & Sons, Inc 109 Diluted Earnings per Share Recomputation of EPS Using Incremental Effect of 10% Convertible Bonds LO Copyright ©2019 John Wiley & Sons, Inc 110 Diluted Earnings per Share Recomputation of EPS Using Incremental Effect of 7% Convertible Preferred LO Copyright ©2019 John Wiley & Sons, Inc 111 Diluted Earnings per Share Income Statement Presentation, EPS LO Copyright ©2019 John Wiley & Sons, Inc 112 Diluted Earnings per Share Barton Company Data Assume that Barton Company provides the following information LO Copyright ©2019 John Wiley & Sons, Inc 113 Diluted Earnings per Share Barton Company Basic and Diluted EPS LO Copyright ©2019 John Wiley & Sons, Inc 114 Learning Objective Compare the Accounting for Dilutive Securities and Earnings Per Share Under GAAP and IFRS LO Copyright ©2019 John Wiley & Sons, Inc 115 IFRS Insights Relevant Facts – Similarities • IFRS and GAAP follow the same model for recognizing stock-based compensation: The fair value of shares and options awarded to employees is recognized over the period to which the employees’ services relate • Although the calculation of basic and diluted earnings per share is similar between IFRS and GAAP, the Boards are working to resolve the few minor differences in EPS reporting One proposal in the FASB project concerns contracts that can be settled in either cash or shares IFRS requires that share settlement must be used, while GAAP gives companies a choice The FASB project proposes adopting the IFRS approach, thus converging IFRS and GAAP in this regard LO Copyright ©2019 John Wiley & Sons, Inc 116 IFRS Insights Relevant Facts – Differences • A significant difference between IFRS and GAAP is the accounting for securities with characteristics of debt and equity, such as convertible debt Under GAAP, all of the proceeds of convertible debt are recorded as longterm debt Under IFRS, convertible bonds are “bifurcated”—separated into the equity component (the value of the conversion option) of the bond issue and the debt component • Related to employee share-purchase plans, under IFRS, all employee sharepurchase plans are deemed to be compensatory; that is, compensation expense is recorded for the amount of the discount Under GAAP, these plans are often considered noncompensatory and therefore no compensation is recorded Certain conditions must exist before a plan can be considered noncompensatory—the most important being that the discount generally cannot exceed percent LO Copyright ©2019 John Wiley & Sons, Inc 117 IFRS Insights Relevant Facts – More Differences • Modification of a share option results in the recognition of any incremental fair value under both IFRS and GAAP However, if the modification leads to a reduction, IFRS does not permit the reduction but GAAP does • Other EPS differences relate to (1) the treasury-stock method and how the proceeds from extinguishment of a liability should be accounted for, and (2) how to compute the weighted average of contingently issuable shares LO Copyright ©2019 John Wiley & Sons, Inc 118 IFRS Insights On The Horizon As discussed in the chapter, the FASB is working on a standard that will likely converge to IFRS in the accounting for convertible debt Similar to the FASB, the IASB is examining the classification of hybrid securities; the IASB is also examining Financial Instruments with Characteristics of Equity While GAAP and IFRS are similar as to the presentation of EPS, the Boards have worked together to resolve remaining differences related to earnings per share computations LO Copyright ©2019 John Wiley & Sons, Inc 119 Copyright Copyright © 2019 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Copyright ©2019 John Wiley & Sons, Inc 120 ... accounting for the issuance, conversion, and retirement of convertible securities Contrast the accounting for stock warrants and for stock warrants issued with other securities Describe the accounting. .. cheaper rates The accounting for convertible debt involves reporting issues at the time of (1) issuance, (2) conversion, and (3) retirement LO Copyright ©2019 John Wiley & Sons, Inc Accounting for... Convertible Securities Copyright ©2019 John Wiley & Sons, Inc Preferred Stock Dilutive Securities Accounting for Convertible Debt Convertible bonds can be changed into other corporate securities