FAR · Financial reporting · 10 practice questions
Who Must Present EPS and Which Amounts Are Required Under GAAP?
Publicly traded common or potential common stock, or a public offering filing for those securities, triggers EPS presentation. Below: change one fact to test scope, basic versus diluted EPS, and required income statement captions.
Try one first
Hint
Focus on which type of ownership security is publicly traded, not just whether the entity has investors or public debt.
Answer C. ASC 260 requires EPS presentation by entities that have common stock or potential common stock traded in a public market (and by certain entities registering to sell common stock). A corporation whose common stock is traded on a national securities exchange clearly has publicly traded common stock and therefore must present earnings per share. Options A, B, and C lack publicly traded common stock (or are not common-stock entities) and thus generally do not trigger ASC 260's EPS presentation requirement.
Why not A: This is tempting because the entity is a corporation with common shares, but EPS is not generally required simply because a company is incorporated or has privately held shares. The ASC 260 trigger is whether common stock or potential common stock is publicly traded or the entity is filing to sell common stock.
Why not B: This distractor confuses public debt with public equity. Publicly traded bonds do not by themselves trigger an EPS presentation under ASC 260; the requirement focuses on publicly traded common stock or potential common stock (e.g., publicly traded convertibles would be a different consideration).
Why not D: Partnership ownership interests are not common stock subject to ASC 260's EPS requirements. Private partnership interests generally do not create an EPS presentation requirement.
Same scenario, one fact changes
Base case
Lakeview Corp. is preparing annual U.S. GAAP financial statements. Its only securities are privately held common stock and publicly traded nonconvertible bonds. Its statements are not included in a public equity offering filing. It reports income from continuing operations, a discontinued-operation loss, and net income. Assume no separate SEC or industry rule requires EPS.
Answer: EPS presentation is not required.
Publicly traded nonconvertible bonds do not trigger ASC 260. Lakeview has no public common or potential common stock and no public equity offering filing.
Before you open each one, predict the answer.
Change 1The common stock is traded on a national exchange instead of being privately held.
Answer: Present basic EPS for income from continuing operations and net income on the face of the income statement.
Public common stock triggers EPS. With no potential common shares, Lakeview has a simple capital structure. Discontinued-operations EPS may be shown in the notes.
Change 2The statements are included in an SEC registration filing for an IPO of common stock.
Answer: Present basic EPS for income from continuing operations and net income on the face of the income statement.
The public offering filing triggers EPS before trading begins. Lakeview still has no potential common shares, so only basic EPS is required.
Change 3The publicly traded bonds are convertible into common stock instead of nonconvertible.
Answer: Present both basic and diluted EPS for income from continuing operations and net income on the face of the income statement.
The convertible bonds are publicly traded potential common stock. They trigger EPS scope and create a complex capital structure requiring both basic and diluted EPS.
Key points
- Remember: check for public common or potential common stock, not just public securities.
- A net loss, no dividends, or a small filer size does not remove the EPS requirement.
- Discontinued-operations EPS must be disclosed, but it may appear on the face or in the notes.
- Diluted EPS supplements basic EPS; it never replaces it.
How the exam traps you
- Requiring EPS whenever a company files SEC reports for publicly traded debt. Check whether common or potential common stock trades publicly, or the statements are included in a public equity offering filing.
- Showing EPS only for net income. Also show EPS for income from continuing operations on the face of the income statement.
- Treating diluted EPS as optional when potential common shares exist. A company within EPS scope with a complex capital structure must present both basic and diluted EPS.
Now the same facts as questions
Each question changes one fact from the one before. Watch which change flips the answer.
Question 1
Answer A. Correct. Nonconvertible public debt alone does not trigger EPS.
Why not B: Incorrect. Lakeview has no public common stock, public potential common stock, or public equity offering filing.
Why not C: Incorrect. Lakeview is outside EPS scope and has no potential common shares.
Why not D: Incorrect. EPS is not required; net-income-only presentation also omits a required caption for entities within scope.
Question 2
Answer B. Correct. A simple capital structure requires basic EPS for both captions on the face.
Why not A: Incorrect. Publicly traded common stock brings Lakeview within EPS scope.
Why not C: Incorrect. Without potential common shares, Lakeview is not required to present diluted EPS.
Why not D: Incorrect. Income from continuing operations also requires basic EPS on the face.
Question 3
Answer B. Correct. The filing triggers EPS, and Lakeview's simple capital structure requires only basic EPS for both captions.
Why not A: Incorrect. Inclusion in the public common stock offering filing triggers EPS before trading begins.
Why not C: Incorrect. The IPO filing does not create potential common shares or require diluted EPS.
Why not D: Incorrect. Income from continuing operations also requires basic EPS on the face.
Question 4
Answer C. Correct. Public potential common stock triggers EPS; the complex capital structure requires basic and diluted EPS.
Why not A: Incorrect. The publicly traded convertible bonds are potential common stock, bringing Lakeview within EPS scope.
Why not B: Incorrect. The convertible bonds create a complex capital structure, so basic EPS alone is incomplete.
Why not D: Incorrect. Both EPS measures are required for continuing operations and net income on the face.
Question 2
Hint
Focus on which EPS captions are specifically required on the face of the income statement for a public company, not every caption that could have a per-share amount.
Answer D. For a public company, basic and diluted EPS must be presented on the face of the income statement for income from continuing operations and for net income. Because Raven has dilutive stock options in Year 1, diluted EPS is required in addition to basic EPS. Per-share amounts for discontinued operations should be disclosed but are not required to appear on the face of the income statement (they may be shown in the notes).
Why not A: This is attractive because net income is the bottom-line measure, but it's incorrect: public companies must present EPS for both income from continuing operations and net income on the face of the income statement.
Why not B: This is tempting if a candidate recalls that basic EPS is always required but forgets that a public company with dilutive securities must also present diluted EPS on the face of the income statement. It's wrong because Raven's dilutive options require reporting both basic and diluted EPS.
Why not C: This overgeneralizes the requirement. The face-of-statement requirement for a public company specifically applies to income from continuing operations and net income; EPS for discontinued operations may be disclosed but need not be shown on the face of the income statement.
Question 3
Hint
Focus on what triggers EPS presentation under GAAP: it is not limited to companies whose stock is already trading publicly.
Answer D. Under U.S. GAAP (ASC 260), EPS presentation is required not only for entities with publicly held common stock but also when the entity's financial statements are included in an SEC filing for the sale of common stock to the public. Because Falcon's Year 1 financial statements are included in its IPO registration statement, the requirement to present EPS applies even though Falcon's stock was not publicly traded during Year 1. The existence or number of potential common-share instruments affects diluted EPS calculation, not the initial requirement to present EPS.
Why not A: This is tempting because candidates often associate EPS only with already-public companies, but GAAP's EPS presentation trigger also includes financial statements included in an SEC filing for a public offering. Prior public trading is therefore not the controlling factor here.
Why not B: The expected timing of the offering's completion is irrelevant to the EPS presentation requirement. The trigger is that the financial statements are included in an SEC filing for the public sale of common stock.
Why not C: This distractor confuses the requirement to present EPS with the mechanics of diluted EPS. Potential common-share instruments matter when computing diluted EPS, but they do not determine whether EPS must be presented at all.
Question 4
Hint
Focus on which type of security EPS is designed to measure for owners, not on every fact that makes the entity seem publicly visible.
Answer A. Under U.S. GAAP (ASC 260), the requirement to present EPS is tied to whether an entity's common stock or potential common stock is traded in a public market. Publicly traded debt by itself does not trigger the GAAP EPS presentation requirement. Therefore, Harbor's publicly traded bonds would not require EPS presentation if its common stock and potential common stock are not publicly traded (absent any broader SEC rule).
Why not B: This is tempting because public trading of any security can make a company seem 'public,' but GAAP specifically focuses on common stock (and potential common stock). Publicly traded debt alone does not require EPS presentation.
Why not C: Candidates often associate EPS with profitability, but the presentation requirement is independent of whether the entity reports a profit; an entity required to present EPS must do so even when reporting a loss.
Why not D: External distribution of financial statements does not by itself trigger the GAAP EPS presentation requirement; the key determinant is the trading status of common stock or potential common stock.
Question 5
Hint
Focus on the type of security EPS is meant to inform, not just whether the company has any SEC filing obligation.
Answer A. The EPS presentation requirement is triggered by the existence (or potential existence) of common stock held by the public or by filing financial statements with the SEC in connection with a public offering of common stock (or instruments convertible into common stock). Publicly traded debt or a general SEC filing obligation does not, by itself, require EPS presentation. Therefore, Granite's publicly traded bonds do not automatically obligate it to present EPS unless it has (or is issuing) public common equity or potential common stock.
Why not B: This distractor is tempting because Granite files with the SEC due to public bonds, but EPS is a measure for equity holders. Public debt alone does not create the EPS presentation requirement; EPS focuses on common stock and potential common stock.
Why not C: This overgeneralizes the rule. While SEC filing status matters for many reporting rules, the EPS requirement specifically depends on publicly held common stock or potential common stock or filing in connection with a public offering of common stock, not on any SEC filing obligation for other securities.
Why not D: Accelerated filer categories affect filing deadlines and other compliance matters but do not determine whether EPS must be presented. The EPS trigger is about the presence or planned issuance of common stock or potential common stock.
Question 6
Hint
Focus on two separate issues: when diluted EPS is required, and which per-share amounts must be shown on the face versus what may go in the notes.
Answer C. Because Redwood is publicly traded and has potential common shares (stock options), it must present both basic and diluted EPS. U.S. GAAP requires EPS amounts for income from continuing operations and net income on the face of the income statement; the per-share amount for a discontinued operation may be shown either on the face or in the notes.
Why not A: This sounds conservative but overstates the requirement. GAAP requires continuing-operations and net-income EPS on the face; the EPS amount for a discontinued operation may be presented on the face or in the notes.
Why not B: This is tempting because of confusion between exercised shares and potential common shares. Diluted EPS considers the dilutive effect of outstanding potential common shares (such as stock options), so public companies with options must present diluted EPS as well.
Why not D: This wrongly assumes net income EPS is sufficient. When discontinued operations are reported, EPS for income from continuing operations is still required on the face of the income statement in addition to net income EPS.
Common questions
Do companies with publicly traded debt have to report EPS?
Nonconvertible public debt alone does not trigger EPS. Publicly traded convertible debt can trigger EPS because it is potential common stock.
Is EPS required before an IPO begins trading?
Yes, when the financial statements are included in a filing for a public offering of common stock or potential common stock. Trading does not have to begin first.
Which EPS amounts must appear on the income statement?
Show basic EPS for income from continuing operations and net income; show diluted EPS too if the capital structure is complex. Discontinued-operations EPS may appear on the face or in the notes.
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