Public Company Reporting (SEC, EPS)

Overview

Public companies in the United States are subject to reporting requirements established by the Securities and Exchange Commission (SEC). These requirements ensure that investors receive timely, reliable financial information. The SEC mandates periodic filings and prescribes specific disclosures, including earnings per share (EPS), which is one of the most tested topics on the CPA exam. :::info Key Concept

The SEC has the statutory authority to set accounting standards for public companies but has historically delegated that role to the FASB. However, the SEC establishes reporting and disclosure requirements through Regulation S-X (financial statement rules) and Regulation S-K (non-financial disclosures).

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SEC Filing Requirements

Filer Categories

The SEC classifies registrants into three categories based on public float (market value of voting and non-voting common equity held by non-affiliates):

Filer Type	Public Float	Revenue Test
Large Accelerated Filer	≥ $700 million	N/A
Accelerated Filer	≥ $75 million but < $700 million	N/A
Non-Accelerated Filer	< $75 million	N/A
Smaller Reporting Company	< $250 million (or < $100M revenue with < $700M float)	See threshold
:::tip CPA Exam Tip

The filing deadlines depend on filer category. Large accelerated filers have the shortest deadlines because they have the most resources to prepare filings.

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Form 10-K (Annual Report)

The Form 10-K is the annual report filed with the SEC. It includes:

• Audited financial statements (balance sheet, income statement, cash flows, stockholders' equity, comprehensive income)
• Management's Discussion and Analysis (MD&A)
• Selected financial data (5-year summary, though recently simplified)
• Report of independent registered public accounting firm
• Internal control over financial reporting (for accelerated filers)

10-K Filing Deadlines

Filer Type	Deadline After Fiscal Year-End
Large Accelerated Filer	60 days
Accelerated Filer	75 days
Non-Accelerated Filer	90 days

Form 10-Q (Quarterly Report)

The Form 10-Q is filed for each of the first three fiscal quarters (not the fourth — that's covered by the 10-K). It includes:

• Unaudited (but reviewed) interim financial statements
• Condensed balance sheet, income statement, and cash flows
• Interim MD&A
• Updates to risk factors

10-Q Filing Deadlines

Filer Type	Deadline After Quarter-End
Large Accelerated Filer	40 days
Accelerated Filer	40 days
Non-Accelerated Filer	45 days

Form 8-K (Current Report)

The Form 8-K reports material events that occur between periodic filings. It must generally be filed within 4 business days of the triggering event. Common triggering events include:

• Entry into or termination of a material agreement
• Bankruptcy or receivership
• Acquisition or disposition of assets
• Changes in certifying accountant
• Changes in control of the registrant
• Departure of directors or principal officers
• Unregistered sales of equity securities
  note

  Form 8-K has no financial statement requirement — it is an event-driven disclosure.

Earnings Per Share (EPS)

EPS is governed by ASC 260 (Earnings Per Share) and is required to be reported on the face of the income statement by all public entities.

Simple vs. Complex Capital Structure

Structure	Description	EPS Reported
Simple	Only common stock outstanding (no potentially dilutive securities)	Basic EPS only
Complex	Has potentially dilutive securities (options, warrants, convertibles, contingent shares)	Basic EPS and Diluted EPS

warning

EPS is reported with equal prominence on the face of the income statement. If both basic and diluted EPS are presented, they must be equally visible. EPS must be shown for both income from continuing operations and net income.

Basic EPS

Formula

$$\text{Basic EPS} = \frac{\text{Income Available to Common Shareholders}}{\text{Weighted Average Common Shares Outstanding}}$$

Numerator: Income Available to Common Shareholders

Start with net income and adjust for preferred stock dividends:

Preferred Stock Type	Adjustment
Cumulative preferred	Subtract the annual dividend regardless of whether declared
Noncumulative preferred	Subtract dividends only if declared

$$\text{Income Available} = \text{Net Income} - \text{Preferred Dividends}$$

danger

For cumulative preferred stock, you always subtract the annual dividend — even if the board did not declare a dividend that year. This is the most commonly tested nuance.

Denominator: Weighted Average Shares Outstanding

Shares are weighted by the fraction of the year they were outstanding.

Example: Bear Co. has the following common stock activity during the year:

Date	Event	Shares
Jan 1	Beginning balance	100,000
Apr 1	Issued new shares	+20,000
Oct 1	Repurchased treasury shares	−10,000

$$\text{WACSO} = (100{,}000 \times \tfrac{12}{12}) + (20{,}000 \times \tfrac{9}{12}) + (-10{,}000 \times \tfrac{3}{12})$$ $$= 100{,}000 + 15{,}000 - 2{,}500 = 112{,}500$$

If Bear Co. reported net income of $450,000 and had $50,000 in cumulative preferred dividends:

$$\text{Basic EPS} = \frac{\$450{,}000 - \$50{,}000}{112{,}500} = \frac{\$400{,}000}{112{,}500} = \$3.56$$

Stock Dividends and Stock Splits

Stock dividends and stock splits are treated as if they occurred at the beginning of the earliest period presented. This means:

• Retroactively adjust all prior periods
• No weighting is needed — apply to the entire period

  If Bear Co. declared a 2-for-1 stock split on July 1, the weighted average shares would use the post-split number for the entire year.

Diluted EPS

Diluted EPS assumes that all potentially dilutive securities have been converted or exercised. It represents the worst-case EPS scenario.

$$\text{Diluted EPS} = \frac{\text{Adjusted Income}}{\text{Adjusted Weighted Average Shares}}$$

If-Converted Method (Convertible Securities)

Used for convertible bonds and convertible preferred stock. Assumes conversion occurred at the beginning of the period (or date of issuance, if later).

Convertible Bonds

• Numerator: Add back interest expense (net of tax) that would not have been paid
• Denominator: Add the shares that would have been issued upon conversion

  MAS Inc. has $1,000,000 of 6% convertible bonds, convertible into 50,000 shares. Tax rate is 25%. Numerator adjustment:

  $$\text{Interest saved} = \$1{,}000{,}000 \times 6\% = \$60{,}000$$ $$\text{After-tax} = \$60{,}000 \times (1 - 0.25) = \$45{,}000$$ Denominator adjustment: +50,000 shares

Convertible Preferred Stock

• Numerator: Add back the preferred dividends that were subtracted in basic EPS
• Denominator: Add the shares that would have been issued upon conversion

  Gies Co. has 10,000 shares of convertible preferred stock ($5 dividend per share), each convertible into 4 common shares. Numerator adjustment: +$50,000 (preferred dividends added back) Denominator adjustment: +40,000 shares

  info

  For convertible preferred stock, there is no tax adjustment because preferred dividends are not tax-deductible.

Treasury Stock Method (Options & Warrants)

Used for stock options and warrants. Assumes the proceeds from exercise are used to buy back shares at the average market price. Steps:

1. Assume all options/warrants are exercised → shares issued
2. Calculate proceeds: shares × exercise price
3. Assume proceeds used to repurchase shares at average market price
4. Net new shares = shares issued − shares repurchased

   Illini Entertainment has 10,000 stock options with an exercise price of $20. The average market price is $50.

   $$\text{Proceeds} = 10{,}000 \times \$20 = \$200{,}000$$ $$\text{Shares repurchased} = \frac{\$200{,}000}{\$50} = 4{,}000$$ $$\text{Net new shares} = 10{,}000 - 4{,}000 = 6{,}000$$ Numerator adjustment: $0 (no income effect for options) Denominator adjustment: +6,000 shares
   warning

   Options and warrants are dilutive only when the exercise price is below the average market price (in-the-money). If the exercise price exceeds the market price, the security is antidilutive and excluded.

Potentially Dilutive Securities

The following securities may be potentially dilutive:

Security	Method	Dilutive When
Stock options/warrants	Treasury stock	Exercise price < average market price
Convertible bonds	If-converted	Incremental EPS < basic EPS
Convertible preferred	If-converted	Incremental EPS < basic EPS
Contingently issuable shares	Include if conditions are met	Conditions are satisfied by period-end

Antidilution Rule

:::danger Critical Rule

A security is antidilutive if including it would increase EPS (or decrease the loss per share). Antidilutive securities are excluded from diluted EPS. Test each security individually, ranking from most dilutive to least dilutive (lowest incremental EPS to highest). Add securities one at a time — stop when adding the next security would be antidilutive.

::: Incremental EPS for each security:

$$\text{Incremental EPS} = \frac{\text{Increase in Numerator}}{\text{Increase in Denominator}}$$

Example: BIF Partners has basic EPS of $4.00 and three potentially dilutive securities:

Security	Numerator Effect	Denominator Effect	Incremental EPS
Options	$0	+5,000	$0.00
Convertible bonds	+$30,000	+10,000	$3.00
Convertible preferred	+$80,000	+15,000	$5.33
Rank by incremental EPS: Options ($0.00), Bonds ($3.00), Preferred ($5.33).

1. Add Options: EPS = $400,000 / 105,000 = $3.81 ✓ (dilutive)
2. Add Bonds: EPS = $430,000 / 115,000 = $3.74 ✓ (dilutive)
3. Add Preferred: EPS = $510,000 / 130,000 = $3.92 ✗ (antidilutive — EPS increased from $3.74) Diluted EPS = $3.74 (exclude convertible preferred)

EPS Disclosure Requirements

ASC 260 requires the following disclosures:

• Basic and diluted EPS on the face of the income statement
• EPS for income from continuing operations and net income
• EPS for discontinued operations may be presented on the face or in the notes
• A reconciliation of the numerator and denominator from basic to diluted EPS
• Description of potentially dilutive securities not included due to antidilution

Comprehensive Example

Kingfisher Industries reports the following for the year ended December 31:

Item	Amount
Net income	$900,000
Cumulative preferred dividends (nonconvertible)	$100,000
Weighted average common shares	200,000
8% convertible bonds (face $500,000; convertible into 20,000 shares)	Interest = $40,000
Stock options (15,000 options, exercise price $25, avg market price $50)	—
Tax rate	25%
Step 1: Basic EPS

$$\text{Basic EPS} = \frac{\$900{,}000 - \$100{,}000}{200{,}000} = \frac{\$800{,}000}{200{,}000} = \$4.00$$

Step 2: Rank dilutive securities

Security	Numerator Effect	Denominator Effect	Incremental EPS
Options	$0	+7,500	$0.00
Convertible bonds	+$30,000 (= $40,000 × 0.75)	+20,000	$1.50
Options: Treasury stock method → 15,000 − (15,000 × $25 / $50) = 15,000 − 7,500 = 7,500 net shares
Step 3: Add most dilutive first

1. Add options: ($800,000) / (200,000 + 7,500) = $800,000 / 207,500 = $3.86 ✓
2. Add bonds: ($800,000 + $30,000) / (207,500 + 20,000) = $830,000 / 227,500 = $3.65 ✓ Diluted EPS = $3.65

Summary

Topic	Key Rule
10-K deadline	60 / 75 / 90 days (LAF / AF / NAF)
10-Q deadline	40 / 40 / 45 days (LAF / AF / NAF)
8-K deadline	4 business days
Basic EPS numerator	Net income − preferred dividends
Cumulative preferred	Always subtract dividend
Noncumulative preferred	Subtract only if declared
Stock splits/dividends	Retroactive adjustment
Convertible securities	If-converted method
Options/warrants	Treasury stock method
Antidilution	Exclude if security increases EPS
Ranking	Most dilutive to least dilutive

:::tip Final Exam Reminder

Always compute basic EPS first, then test each potentially dilutive security. On the exam, if you see options with an exercise price above market price, they are out of the money and excluded immediately.

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