Earnings Per Share for Companies With Complex Capital Structures

Date of Submission


Document Type


Degree Name

Master of Science in Accounting




Eleanor Fillebrown


Earnings per share, Corporations --United States --Accounting, Accounting --Standards --United States.

Call No. at the Univ. of New Haven Library

AS 36 .N29 Acc. 1996 no.2


This paper is devoted to accounting for Earnings per Share (EPS) for the companies with complex capital structures. Calculation of primary and fully diluted EPS as required by APB No. 15 is based on numerous assumptions regarding the timeliness and likelihood of conversion of convertible securities. The validity of these assumptions is evaluated through a comprehensive study of APB No. 15 and the pertinent accounting literature. It was found that the effective yield test doesn’t result in a high discrimination power to properly classify CSE and non-CSE. The Treasury Stock Method does not incorporate constant changes in market prices on underlying securities. Therefore, options and warrants once determined as dilutive, may not be dilutive any longer. The assumption that the proceeds from the issuance of stock in exchange for options and warrants are used to acquire a company’s own stock is not supported by the reviewed accounting literature.

It was also found that the weighted average method of calculation of the number of shares may be deteriorated when income and number of shares are highly volatile. This issue should be recommended for further research.

To eliminate the impact of the assumptions made by APB No. 15 on EPS calculation, this work proposes discarding primary and fiilly diluted EPS in favor of basic EPS. Therefore, EPS represents a real figure rather than a theoretical one based on unverified assumptions. Consequently, the 3% materiality standard is discarded since there is no need to report dual EPS. All assumptions underlying the determination of CSE are also abandoned.

It should be noted that the proposed SFAS “Earnings per Share and Disclosure of Information about Capital Structure” discards most of the assumptions made by APB No. 15 and coincides with proposals introduced in the thesis.