ASC 260 earnings per share

Earnings per share is the most quoted number in a public company's results, and ASC 260 sets out exactly how it is built. Most of the work is in diluted EPS: which options, warrants and convertibles count, and how. This guide explains basic EPS, the treasury stock and if-converted methods, the two-class method, works from basic to diluted EPS for a company with preferred stock, options and convertible bonds, and covers antidilution, disclosures and the differences from IAS 33.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. 4 minute read.

Short answer

ASC 260 Earnings per Share requires entities with publicly traded common stock, or that are filing to issue it, to present basic and diluted earnings per share on the face of the income statement. Basic EPS divides income available to common stockholders, after preferred dividends, by the weighted average number of common shares outstanding. Diluted EPS adds the shares that would be issued if dilutive instruments were exercised or converted: options, warrants and unvested restricted stock units through the treasury stock method, convertible instruments through the if-converted method, which ASU 2020-06 made the rule for all convertibles, and contingently issuable shares when their conditions would be met. Instruments that would increase EPS are antidilutive and left out, judged against income from continuing operations. Companies with participating securities, such as unvested shares that receive dividends, use the two-class method. Stock splits and stock dividends are applied retroactively to all periods presented. In this guide's example, basic EPS of $1.10 falls to diluted EPS of $1.06.

At a glance

Applies to
Public companies
Basic EPS
Earnings ÷ shares
Options
Treasury stock method
Convertibles
If-converted method
Antidilutive
Excluded
IFRS
IAS 33, mostly the same
ASC 260 earnings per shareApplies to: Public companies; Basic EPS: Earnings ÷ shares; Options: Treasury stock method; Convertibles: If-converted method; Antidilutive: Excluded; IFRS: IAS 33, mostly the same.KEY FACTS AT A GLANCEASC 260 earnings per shareApplies toPublic companiesBasic EPSEarnings ÷ sharesOptionsTreasury stock methodConvertiblesIf-converted methodAntidilutiveExcludedIFRSIAS 33, mostly the sameTax BakersASC 260 earnings per shareApplies to: Public companies; Basic EPS: Earnings ÷ shares; Options: Treasury stock method; Convertibles: If-converted method; Antidilutive: Excluded; IFRS: IAS 33, mostly the same.KEY FACTS AT A GLANCEASC 260 earnings per shareApplies toPublic companiesBasic EPSEarnings ÷ sharesOptionsTreasury stock methodConvertiblesIf-converted methodAntidilutiveExcludedIFRSIAS 33, mostly the sameTax Bakers
Key facts at a glance, as set out in this guide.

Who must present EPS under ASC 260?

Entities whose common stock or potential common stock is traded in a public market, or that are filing to issue it. They present basic and diluted EPS for income from continuing operations and net income on the face of the income statement, and EPS for discontinued operations on the face or in the notes. Private companies need not present EPS, but if they choose to, they follow ASC 260.

How is basic EPS calculated?

Income available to common stockholders divided by the weighted average number of common shares outstanding. Preferred dividends are deducted: those declared in the period on noncumulative preferred stock, and the full period's dividends on cumulative preferred stock whether declared or not. Shares are weighted by the time they were outstanding, and stock splits, reverse splits and stock dividends are applied retroactively to every period presented, including those that happen after year end but before the statements are issued. See ASC 855 subsequent events.

How is diluted EPS calculated?

  • Treasury stock method for options, warrants and unvested RSUs: the shares issued are reduced by the shares that the assumed proceeds would buy back at the average market price. Proceeds include the exercise price and compensation cost not yet recognized. See ASC 718 stock-based compensation.
  • If-converted method for convertible debt and convertible preferred stock: the instrument is assumed converted at the start of the period, adding the shares and removing the after-tax interest or the preferred dividends. Since ASU 2020-06, it applies to all convertible instruments, and instruments that can be settled in cash or shares are presumed settled in shares.
  • Contingently issuable shares are included if the conditions would be met were the end of the period the end of the contingency period.
  • Antidilution: instruments are added in order from most to least dilutive, and any that would increase EPS, or reduce a loss per share, are left out. When there is a loss from continuing operations, diluted EPS equals basic EPS.

ASC 260 in practice: from basic to diluted EPS

A company earns net income of $12 million and pays preferred dividends of $1 million. It has 10 million common shares outstanding all year, 1 million options with an exercise price of $20 against an average share price of $25, and $10 million of 4% convertible bonds convertible into 500,000 shares. Its tax rate is 21%.

From basic to diluted shares (thousands)From basic to diluted shares (thousands)10,000Basicshares+200Options(treasury stock)+500Convertiblebonds10,700Dilutedshares
Each dilutive instrument adds shares; the convertible also adds back its after-tax interest.
Income ($)SharesPer share ($)
Net income less preferred dividends11,000,00010,000,000Basic 1.10
Options: 1,000,000 less 800,000 bought back with $20 million proceeds0200,000
Convertible bonds: after-tax interest added back316,000500,0000.632 each, dilutive
Diluted11,316,00010,700,000Diluted 1.06

The options add 200,000 shares and no income, so they are the most dilutive and go first. The bonds add 500,000 shares and $316,000 of after-tax interest, 0.632 per share, which is below basic EPS of $1.10, so they are dilutive too. Had the average share price been below $20, the options would have been antidilutive and excluded.

When is the two-class method used?

When a company has participating securities: instruments that share in dividends with common stock, such as unvested restricted shares with nonforfeitable dividend rights, or some preferred stock. Undistributed earnings are allocated between common stock and the participating securities as if all earnings were distributed, and EPS is calculated for each class. Losses are allocated to participating securities only if they have an obligation to share in them.

What must be disclosed?

A reconciliation of the numerators and denominators of basic and diluted EPS for income from continuing operations, the effect of preferred dividends, securities excluded because they were antidilutive in the period, and transactions after the period end that would materially change the number of shares outstanding. EPS is also presented in quarterly reports, where year-to-date diluted shares are a weighted average of the quarterly amounts.

How does ASC 260 compare with IAS 33?

The two are largely converged and use the same methods. Differences remain in details, such as how year-to-date diluted EPS is computed in interim periods and how the two-class method is applied to participating securities. See IAS 33 earnings per share and IFRS vs US GAAP key differences.

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Questions people ask

How is basic EPS calculated under ASC 260?

Income available to common stockholders, after preferred dividends, divided by the weighted average number of common shares outstanding in the period.

What is the treasury stock method?

The method for options, warrants and unvested RSUs in diluted EPS: the shares issued on exercise are reduced by the shares the assumed proceeds would repurchase at the average market price.

What did ASU 2020-06 change in EPS?

It requires the if-converted method for all convertible instruments and presumes that instruments that may be settled in cash or shares are settled in shares.

What is an antidilutive security?

One whose inclusion would increase earnings per share or reduce loss per share; it is excluded from diluted EPS but disclosed.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. FASB Accounting Standards Codification: Topic 260, Earnings per Share
  2. Financial Accounting Standards Board
  3. Deloitte DART: Roadmap, earnings per share

Rules and fees change. If you are reading this long after October 21, 2026, confirm the figures with the source before you rely on them.

IAS 33IAS 33 basic and diluted earnings per shareASC 718ASC 718 stock-based compensationASC 855ASC 855 subsequent events

More in ASC 260

TopicThe ASC 260 topic page

This guide is general information. It is not tax or legal advice for your situation.