Objective: to simplify the computation of earnings per share and to make the U.S. standard more compatible with the EPS standards of other countries and with the International Accounting Standards Committee.

 Objective: measure the performance of an entity over the reporting period.
Basic EPS =

a) income available to common stockholders (numerator)

divided by:

b) the weighted-average number of shares of common stock outstanding 
during the period. (denominator)

Shares issued during the period shall be weighted for the portion of the period that they were outstanding.

Deduct both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from the income from continuing operations and also from net income.

If there is a loss from continuing operations or a net loss, the amount of the loss shall be increased by those preferred dividends.

Objective: to measure performance of an entity over the reporting period- while giving effect to all dilutive potential common shares that were outstanding during the period.

Computation:

Increase the denominator to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.

In computing dilutive effect of convertible securities, the numerator is adjusted to add back:

a. any convertible preferred dividends, and

b. the after-tax amount of interest recognized during the period associated with any convertible debt.

The computation of diluted EPS shall not assume conversion or exercise of securities that would have an antidilutive effect on EPS.

In determining whether a security is dilutive or antidilutive, each issue of potential common shares shall be considered separately rather than in the aggregate. 

To reflect maximum potential dilution, each issue or series of issues of potential common shares shall be considered in sequence from the most dilutive to the least dilutive.

The dilutive effect of outstanding options and warrants issued by the reporting entity shall be reflected in diluted EPS by application of the treasury stock method.

Under the treasury stock method:

a. Exercise of options and warrants shall be assumed at the beginning of the period (or at time of issuance, if later) and common shares shall assumed to be issued.

b. The proceeds from exercise shall be assumed to be used to purchase common stock at the average market price during the period.

c. The incremental shares (the difference between the number of shares assumed issued and the number assumed purchased) shall be included in the denominator of the diluted EPS computation.

The dilutive effect of convertible securities shall be reflected in the diluted EPS by application of the if-converted method.

Under this method:

a. if an entity has convertible preferred outstanding, the preferred dividends applicable to convertible preferred stock shall be added back to the numerator.

b. if an entity has convertible debt outstanding, interest charges applicable to the convertible debt shall be added back to the numerator, adjusted for the income tax effect.

c. the convertible preferred stock or convertible debt shall be assumed to have been converted at the beginning of the period (or at time of issuance, if later), and the resulting common shares shall be included in the denominator.

Convertible preferred stock is antidilutive whenever the amount of the dividend declared in or accumulated for the current period per common share obtainable on conversion exceeds basic EPS.

Convertible debt is antidilutive whenever its interest (net of tax) per common share obtainable on conversion exceeds basic EPS.

entities with simple capital structures, that is, those with only common stock outstanding, shall present basic per-share amounts for income from continuing operations and for net income on the face of the income statement.

All other entities shall present basic and diluted per share amounts for income from continuing operations and for net income on the face of the income statement with equal prominence. 

EPS data shall be presented for all periods for which an income statement or summary of earnings is presented.

If diluted EPS data are reported for at least one period, they shall be reported for all periods presented, even if they are the same amounts of basic EPS.

If basic and diluted EPS are the same amount, dual presentation can be accomplished in one line on the income statement.

The terms basic EPS and diluted EPS are used in this Statement to identify EPS data to be presented and are not required to be captions used in the income statement. There are no explicit requirements for the terms to be used in the presentation of basic and diluted EPS.

For each period for which an income statement is presented, an entity shall disclose the following:

a. A reconciliation of the numerators an denominators of the basic and diluted per-share computations for income from continuing operations. The reconciliation shall include the individual income and share amount effects of all securities that affect earnings per share.

b. The effect that has been given to preferred dividends in arriving at income available to common stockholders in computing EPS.

c. Securities that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because to do so would have been antidilutive for the period(s) presented.