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Two-class method belongs in a reconciled numerator-and-denominator workpaper. The two-class method allocates distributed and undistributed earnings between common shareholders and participating security holders according to their rights. The allocation changes the numerator available to common shares; it is not a simple share-count adjustment.
Apply it
Assume $1,000,000 remains after required preferred dividends. If common shares have 900,000 participation units and another security has 100,000 equal units, allocate $900,000 to common and $100,000 to the other security before computing EPS.
Review two-class method against participating security. Reconcile two-class method to income available to common shareholders, the dated two-class method evidence, and its final presentation.
The two-class method record ties participating security to its source date, measured amount, and income available to common shareholders effect.
Keep the boundary clear
Use the actual participation formula, caps, and loss rights. Adding participating units to the common denominator without allocating earnings does not apply the method.
Authority
Read ASC 260-10-45-60B for the steps in the two-class method.
Put the concept to work
Apply this concept
- Explain and apply two-class method within a reconciled numerator-and-denominator workpaper using supplied authoritative facts.
Learning resources
Choose a lesson, try an application, or inspect the sources behind this concept.
Build on these ideas
- Participating security — Apply
To apply this concept: Required. This earlier step supplies an input required by the EPS workpaper.