Question & AnswerQ&A (SEC MEMORANDUM CIRCULAR NO. 10)
The primary purpose is to govern the form and content of financial statements of issuers of securities, specifically adopting the Statement of Financial Accounting Standards No. 29 (Earnings Per Share) and amending Part II (m) (15) of RSA Rule 48-1 to prescribe rules on how earnings per share should be calculated and presented.
Basic earnings per share is calculated by dividing the net income or loss for the period attributable to common shareholders by the weighted average number of common shares outstanding during the period.
Net income or loss for the period is adjusted by deducting preferred dividends to derive the net income or loss attributable to common shareholders.
It means the average number of common shares outstanding during the period, adjusted for events (other than conversion of potential common shares) that have changed the number of common shares without a corresponding change in resources.
Diluted earnings per share is calculated by adjusting the net income attributable to common shareholders and the weighted average number of shares outstanding to account for the effects of all dilutive potential common shares.
Dilutive potential common shares are shares which, if converted into common shares, would decrease net income per share from continuing common operations and include stock options and other potential shares that might dilute earnings per share.
Adjustments include adding back after-tax effects of dividends on dilutive potential common shares deducted previously, interest recognized for dilutive potential common shares, and other income or expense changes resulting from conversion of the dilutive potential common shares.
They should be adjusted retroactively for stock dividends, stock splits, reverse stock splits, effects of error corrections, changes in accounting principles accounted for retroactively, and effects of business combinations accounted as pooling of interests.
They should be presented on the face of the income statement with equal prominence for all periods presented.
Corporations should disclose: (i) the amounts used as numerators in calculating basic and diluted EPS and reconcile these amounts to net income or loss, and (ii) the weighted average number of common shares used as denominators for basic and diluted EPS and reconcile these denominators to each other.
Yes, the circular mandates the presentation of basic and diluted earnings per share even if the amounts disclosed reflect a loss per share (negative amounts).
It became effective for financial statements covering periods ending on or after December 31, 1998, with earlier application encouraged. The circular took effect 15 days after its publication in at least two newspapers of general circulation.
Per share calculations for those periods and prior periods should be based on the new number of shares, and this fact should be disclosed.
SFAS No. 29 supplements the circular by providing detailed guidance and clarification on earnings per share calculations and disclosures.