FASB Statement No. 128, Earnings per Share, requires the use of the two-class method of computing basic earnings per share (EPS) for those enterprises with participating securities or multiple classes of common stock. Participating securities are described in Statement No. 128 as securities that may participate in dividends with common stocks according to a predetermined formula with, at times, an upper limit on the extent of participation. This description was explained further in Emerging Issues Task Force (EITF) Issue No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128,” to include a security that may participate in undistributed earnings with common stock in its current form, whether that participation is conditioned upon the occurrence of a specified event or not. However, neither Statement No.128 nor Issue No. 03-6 provides guidance about whether unvested instruments granted as share-based compensation are participating securities. To address this, on June 16, 2008 the Financial Accounting Standards Board issued FASB Staff Position (FSP) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, to clarify that instruments granted in share-based payment transactions can be participating securities prior to the requisite service having been rendered. A basic principle of the FSP is that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of EPS pursuant to the two-class method. Following is a summary of the guidance in the FSP:
- The holder of a share-based payment award that includes nonforfeitable rights to dividends or dividend equivalents receives a noncontingent transfer of value each time an entity declares a dividend or dividend equivalent during the contractual period of the share-based payment award. As a result, the award meets the definition of a participating security in its current form, that is, prior to the requisite service having been rendered for the award. However, the right to receive dividends or dividend equivalents that the holder will forfeit if the award does not vest is not a participation right.
- Dividends or dividend equivalents also may be transferred to the holder of a share-based payment award in the form of a reduction in the exercise price of the award (for example, reduction in the exercise price of an equity share option). Such a feature would not be considered a participation right because the award does not represent a nonforfeitable right to participate in undistributed earnings absent the exercise of the award.
- Dividends or dividend equivalents that are actually paid and are accounted for as compensation cost because the unvested share-based payment award is not expected to vest (or does not vest) would not be included in the earnings allocation in computing EPS.
The provisions of this FSP are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented (including interim financial statements, summaries of earnings, and selected financial data) are required to be adjusted retrospectively to conform with the provisions of the FSP. Early application is not permitted. The complete text of this FSP is available at http://www.fasb.org/pdf/fsp_eitf03-6-1.pdf. |
