FASB Issues Guidance on Unvested Share-Based Payment Transactions for EPS Calculation
June 30, 2008
On June 16, 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FASB Staff Position clarified that “unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method” described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share.
The "two-class method" referenced above is a method for allocating earnings in computing earnings per share (EPS) when an entity's capital structure includes two or more classes of common stock or common stock and participating securities. It calculates EPS based on dividends declared on common stock and participating securities and participation rights of participating securities in any undistributed earnings. EITF 03-6 defines a "participating security" as "[a] security that may participate in undistributed earnings with common stock, whether that participation is conditioned upon the occurrence of a specified event or not, regardless of the form of participation.”
The FASB Staff Position noted that the holder of a share-based payment award that includes nonforfeitable rights to dividend or dividend equivalents receives a noncontingent transfer of value each time a dividend or dividend equivalent is declared during the award's vesting period, which would meet the definition of "participating security." In contrast, dividends or dividend equivalents transferred to a holder of a share-based payment award in the form of a reduction in the exercise price of the award 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.
The FASB Staff Position will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior EPS data presented must be adjusted retrospectively to conform with the provisions of the FASB Staff Position.
http://www.fasb.org/pdf/fsp_eitf03-6-1.pdf