This is part 4 of 4 related to earnings per share in Chapter 16. Be sure to view parts 1,2 and 3.

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Prepared by Coby Harmon University of California, Santa Barbara Intermediate Accounting

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EPS Presentation and Disclosure A company should show per share amounts for: Income from continuing operations, Income before extraordinary items, and Net income. Per share amounts for a discontinued operation or an extraordinary item should be presented on the face of the income statement or in the notes. LO 7 Compute earnings per share in a complex capital structure. EPS - Complex Capital Structure

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LO 7 Compute earnings per share in a complex capital structure. Complex capital structures and dual presentation of EPS require the following additional disclosures in note form. Description of pertinent rights and privileges of the various securities outstanding. A reconciliation of the numerators and denominators of the basic and diluted per share computations, including individual income and share amount effects of all securities that affect EPS. The effect given preferred dividends in determining income available to common stockholders in computing basic EPS. Securities that could potentially dilute basic EPS in the future that were excluded in the computation because they would be antidilutive. Effect of conversions subsequent to year-end, but before issuing statements. EPS - Complex Capital Structure

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LO 7 Illustration 16-28 Summary of EPS Computation

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LO 9 Compute earnings per share in a complex situation. Illustration 16-B1 Balance Sheet for Comprehensive Illustration APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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LO 9 Compute earnings per share in a complex situation. Balance Sheet for Comprehensive Illustration Illustration 16-B1 APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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Illustration 16-B2 Computation of Earnings per Share—Simple Capital Structure LO 9 Compute earnings per share in a complex situation. APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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Diluted Earnings Per Share Steps for computing diluted earnings per share: Determine, for each dilutive security, the per share effect assuming exercise/conversion. Rank the results from step 1 from smallest to largest earnings effect per share. Beginning with the earnings per share based upon the weighted-average of ordinary shares outstanding, recalculate earnings per share by adding the smallest per share effects from step 2. Continue this process so long as each recalculated earnings per share is smaller than the previous amount. LO 9 Compute earnings per share in a complex situation. APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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The first step is to determine a per share effect for each potentially dilutive security. Per Share Effect of Options (Treasury-Share Method) , Diluted Earnings per Share Illustration 16-B3 LO 9 Compute earnings per share in a complex situation. APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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The first step is to determine a per share effect for each potentially dilutive security. Per Share Effect of 8% Bonds (If-Converted Method) , Diluted Earnings per Share Illustration 16-B4 LO 9 Compute earnings per share in a complex situation. APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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The first step is to determine a per share effect for each potentially dilutive security. Per Share Effect of 10% Bonds (If-Converted Method) , Diluted Earnings per Share Illustration 16-B5 LO 9 Compute earnings per share in a complex situation. APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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The first step is to determine a per share effect for each potentially dilutive security. Per Share Effect of 10% Convertible Preference Shares (If-Converted Method) , Diluted Earnings per Share LO 9 Compute earnings per share in a complex situation. Illustration 16-B6 APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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The first step is to determine a per share effect for each potentially dilutive security. Ranking of per Share Effects (Smallest to Largest) , Diluted Earnings per Share Illustration 16-B7 LO 9 Compute earnings per share in a complex situation. APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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The next step is to determine earnings per share giving effect to the ranking Recomputation of EPS Using Incremental Effect of Options Illustration 16-B8 LO 9 Compute earnings per share in a complex situation. The effect of the options is dilutive . APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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The next step is to determine earnings per share giving effect to the ranking Recomputation of EPS Using Incremental Effect of 8% Convertible Bonds Illustration 16-B9 LO 9 Compute earnings per share in a complex situation. The effect of the 8% convertible bonds is dilutive . APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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The next step is to determine earnings per share giving effect to the ranking Recomputation of EPS Using Incremental Effect of 10% Convertible Bonds Illustration 16-B10 LO 9 Compute earnings per share in a complex situation. The effect of the 10% convertible bonds is dilutive . APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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The next step is to determine earnings per share giving effect to the ranking Recomputation of EPS Using Incremental Effect of 10% Convertible Preference Shares Illustration 16-B11 LO 9 Compute earnings per share in a complex situation. The effect of the 10% convertible preference shares is NOT dilutive . APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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Finally , Webster Corporation ’ s disclosure of earnings per share on its income statement. Illustration 16-B12 LO 9 Compute earnings per share in a complex situation. The effect of the 10% convertible preference shares is NOT dilutive . APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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Assume that Barton Company provides the following information. Illustration 16-B13 LO 9 Compute earnings per share in a complex situation. Basic and Diluted EPS Illustration 16-B14 APPENDIX 16B COMPREHENSIVE EARNINGS PER SHARE EXAMPLE

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RELEVANT FACTS 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 GAAP and IFRS in this regard. 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.

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