convertible securities that may decrease (dilute) EPS when exercised
Dilutive Securities
convertible securities that may decrease (dilute) EPS when exercised
can be converted into other securities during a specific time period after issuance; classified as liability
Convertible Debt
can be converted into other securities during a specific time period after issuance; classified as liability
Conversion Method for Convertible Debt
Book Value Method
issuer offers additional consideration (cash/stock), called sweetener, to encourage prompt conversion; report sweetener as a current period expense (“Debt Conversion Expense”), not a reduction of equity
Induced Conversions
option to convert into fixed number of common shares; classified as equity
Convertible Preferred Stock
option to convert into fixed number of common shares; classified as equity
Conversion Method for Convertible Preferred Stock
Book Value Method
if par value of CS is greater than book value of PS then debit RE for difference
certificate for holder to acquire shares at certain price within stated period
Stock Warrant
Do bonds with NON DETACHABLE warrants require allocation?
NO!
require entire proceeds as debt
if issue new shares of stock, old SHs have right to purchase new shares in proportion to current holding (stock right)
(No formal entry until additional shares issues for cash)
Rights to Subscribe to Additional Shares
employee receive stock based on company performance
Stock Compensation Plans
give employees option to purchase stock at given price over period of time
Stock Options Plans
Determining expense method for Stock Options Plans
Fair Value Method using option pricing model
transfer shares to employees – shares can’t be sold, transferred, or pledged until vesting occurs
(Requires JE for date of grant)
Restricted Stock Plans
includes only common stock (no potential common stock that upon conversion/exercise could dilute EPS)
Simple EPS
includes securities that could have a dilutive effect
Complex EPS
upon conversion/exercise increase EPS
Anti-dilutive Securities
Measurement Method for Diluted EPS- convertible Securities
“If Converted Method”
If Converted Method assumes:
Conversion at beginning of period (or issuance date if later)
Elimination of related interest (net of tax) or dividends
Measurement for Diluted EOS -Options and Warrants
Treasury Stock Method
Treasury Stock Method assumes:
Options/warrants exercised at beginning of year (or issuance date if later)
Company uses proceeds to purchase treasury shares
Exercise price > mkt price
ANTIDILUTIVE