ASC 260 Implications for Awards with Market and Performance Conditions

Accounting Standard Codification Topic 260 (ASC 260) governs the computation of earnings per share (EPS), separating between basic and diluted EPS. Diluted EPS is relevant for firms with complex capital structures, specifically securities or contracts that could convert into common stock or result in the issuance of common stock. Because these instruments are excluded from basic EPS, their inclusion in diluted EPS is important to the usefulness and reliability of accounting information. Users of financial statements look at measures of diluted EPS to understand how securities that are not yet classified as common stock could dilute their ownership stake.

A particularly challenging topic within ASC 260 is the computation of diluted EPS for share-based compensation instruments containing market and/or performance conditions, which are contingently issuable shares, as defined by ASC 718. In this white paper, we review the relevant technical issues and explore the practical calculation issues that arise when running these awards through the treasury stock method.