Joined: 25 Nov 2009 Location: United States
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Posted: 11 Oct 2010 at 11:50 | IP Logged
I am confused as well with this question. They are asking for Basic EPS but below are the details. The only thing i could think of is that maybe someone actually converted a Bond or other dilutive security in to stock Maybe some could explain better.
Which of the following items, if dilutive and if other conditions are met, would enter into the determination of the weighted average shares outstanding to be used in the basic earnings per share (basic EPS) calculation?
I. Stock options.
II. Contingent shares.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
Explanation
Choice "b" is correct. Contingent shares (that are dilutive) are included in the calculation of basic
Contingent issuable shares do not require cash consideration and depend on some future event or on certain conditions being met. Contingent shares (that are dilutive) are also included in the calculation of
basic EPS if (and as of the date) all conditions for issuance are met. Issuable shares contingent on the attainment of a certain level of earnings are treated as follows, if dilutive:
1. If the necessary conditions have been satisfied by the end of the period, those shares are included in basic EPS as of the beginning of the period in which the conditions were satisfied.
2. If the necessary conditions have not been satisfied by the end of the period, the number of contingently issuable shares included in diluted EPS is based on the number of shares that would be issuable, if any, if the end of the reporting period were the end of the contingency period. These shares are included as of the beginning of the period (or as of the date of the contingent stock agreement, if later). If the contingency is due to attainment of future earnings and/or future prices of the shares, both earnings to date and current market price, as they exist at the end of the reporting period, are used.
Joined: 27 Sep 2010 Location: United States
Online Status: Offline Posts: 60
Posted: 12 Oct 2010 at 12:37 | IP Logged
I believe that you should just remember the formula for basic EPS (income available to common shareholders/WACSO). They are asking about basic EPS only (include contingent shares if conditions are satisfied) and you should not include options, warrants, etc. in basic EPS. However, if we are thinking of dilutive EPS then everything would be included in the calculation to determine if its dilutive or antidilutive. In other words, ignore convertibles securities when calculating basic EPS only. The condition of the contingency for contingent shares should be met for inclusion in basic eps.
Joined: 25 Nov 2009 Location: United States
Online Status: Offline Posts: 196
Posted: 12 Oct 2010 at 15:22 | IP Logged
May be i have the wrong idea, but i was under the impression that "contingent Shares" were the shares that were outstanding for convertible securities. Can you explain what a contingent share is? I think that's where the confusion comes in.
Joined: 27 Sep 2010 Location: United States
Online Status: Offline Posts: 60
Posted: 12 Oct 2010 at 17:35 | IP Logged
Contingent shares are issued only if certain conditions are satisfied and (example: if company revenue exceeds $5 M then additional shares will be issued or issue additional shares if working capital falls below 1.25.) Contingent shares do not requires cash consideration.
Contingent shares and convertibles securities should be considered separately. Remember that no securities whether converted or not converted should be included in basic EPS.
I believe you are using Becker, look in the glossary (G-10) and it may give you a better view of contingent shares.
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Topic: Contingent shares confusion
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