Comprehensive income and other items affect owner’s equity

Comprehensive income
A measure that includes all changes to equity other than owner contributions and distributions.

Transaction with owners include:
· Issuing or reaquiring stock
· Dividend paid

Transaction include in other comprehensive income
· Foreign currency translation gains and losses
· Adjustments for minimum pension liability
· Unrealized gains and losses from cash flow hedging derivatives
· Unrealized gains and losses from available-for-sale securities

Presentation and disclosure

Simple capital structure

• Basic EPS is presented for income from continuing operations, income before extraordinary items or change in accounting principle, and net income.
• Reported for all accounting periods presented Prior-period EPS is restated for any prior-period adjustments.
• Footnotes are required for stock splits and stock dividends.

Complex capital structure

• Basic and fully diluted EPS are presented for income from continuing operations, income before extraordinary items or change in accounting principle, and net income.
• Reported for all accounting periods presented
• Prior-period EPS is restated for any prior-period adjustments.
• Footnotes are required for diluted EPS.

Treasury stock method

• It assumes that the proceeds that a company receives from an in-the-money option exercise are used to repurchase common shares in the market at the average market price over the reporting period.
• No. increase in the shares outstanding = no. of shares from exercising the options – no. of shares repurchased
• Options and warrants are dilutive whenever their exercise price is less than the averaged stock price over the reporting period because of no adjustment to net income.
• To comply with GAAP, the treasury stock method must be used by a company when computing its diluted EPS.
  
  New shares = (average market price – exercise price) / average market price x no. of shares covered by options/warrants
  

Basic EPS and Diluted EPS

Basic EPS
Basic EPS = (net income – preferred dividends) / (weighted average no. of outstanding common shares

Diluted EPS

• Treat any dilutive securities as if they were converted to common stock from the first of the year or when issued if issued during the current year.
• Only income from continuing operations is considered in determining diluted EPS

To determine whether a convertible security is dilutive,

Convertible pfd. dividends / no. of shares from conversion of pfd, or
Convertible debt interest (1-tax rate) / no of shares from conversion of debt

If the amount is less than basic EPS, the security is dilutive.

Diluted EPS = adjusted income available for common shares / weighted average common and potential common shares outstanding

Adjusted income available for common shares = earnings available for common shares + dividends on dilutive convertible preferred stock + after tax interst on dilutive convertible debt

Diluted EPS = [(net income – preferred dividends) + convertible preferred dividends + (convertible debt interest)(1-t)] / [weighted average shares + shares from conversion of conv. pfd. Shares + shares from conversion of conv. debt + shares issuable from stock options]

Simple vs complex capital structure

Simple capital structure

• Contains no potentially dilutive securities, but only common stockholders, preferred stockholders and nonconvertible debt.
• Companies with simple capital structures only need to report basic EPS.

Complex capital structure

• Contain potential dilutive securities such as warrants and/or options and/or convertible debt instruments.
• Companies that have a complex capital structure must report earnings per share (EPS) on a basic and fully diluted basis
  

Dilutive vs Antidilutive securities

Dilutive securities

• The securities would decrease EPS if exercised and converted to common stock

Antidilutive securities

• The securities that would increase EPS if exercised and converted to common stock.

Potentially dilutive securities

• Include stock options, warrants, convertible debt, and convertible preferred stocks