The simplification, brought about by eliminating common stock equivalents
and the primary EPS calculation, also eliminates a source of arbitrariness.
Thus, if a convertible security is initially classified as a common stock equivalent
, it is always a common stock equivalent
even though current economic conditions may render its conversion into common stock unlikely.
One of those numbers, primary, EPS, is computed assuming that common stock equivalents
, those dilative securities most similar in substance to common stock, were converted to common stock on the first day of the reporting period.
In the example, the convertible preferred shares are common stock equivalents
since their effective yield of 5% ($3,500/$70,000) is less than two-thirds of the Aa corporate bond rate (1 0%).
Consensus: The task force concluded the convertible preferred stock would not be considered a common stock equivalent
unless the yield on the issue date is less than 66 2/3% of the corporate Aa bond rate.
Broadway said that the common stock equivalents
automatically convert at the rate of 1,000 shares of common stock for each share of common stock Equivalents
, and the series G preferred automatically convert at the rate of 100 shares of common stock for each share of series G preferred.
The concept of common stock equivalents
in the computation of primary earnings per share has been widely criticized as confusing, arbitrary, and misleading.
As part of the recapitalisation the company exchanged common stock equivalents
with an aggregate value of approximately USD 11.
Robbins said the difference between basic and primary EPS was that common stock equivalents
are not considered in the computation of basic EPS.
accounting rules call for the presentation of primary earnings per share (net income/ common stock + common stock equivalents
outstanding) and fully diluted earnings per share.
If it is probable the plan will require the issuance of common stock or common stock equivalents
, diluting current equity interests, that should be disclosed as well.