Date of Award

1986

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Accounting

Abstract

Earnings per share (EPS) is considered by many to be one of the most important summary indicators presented in the financial statements. Many financial statement users rely on EPS as the most important single measure of corporate performance. Previous empirical evidence suggests that a strong link exists between EPS changes and stock price changes. The objective of this study was to determine if the provisions of APB 15 provide for consistent reporting of comparable EPS figures across preparers of financial statements. The application of alternative interpretations of provisions of APB 15 has the potential to produce materially different EPS figures. As a result, the degree of comparability of the reported EPS figures across companies is unclear. The existence and application of alternative interpretations of four provisions of APB 15 were examined via a field study approach. Questionnaires were mailed to a random sample of preparers of EPS to elicit data concerning the following provisions: (1) the 3 percent materiality provision, (2) the future expectation exception to the 3 percent materiality provision, (3) the no anti-dilutive security provision, and (4) the warrant/option dilution determination provision. None of the three interpretations of the 3 percent materiality provision were favored over any of the other interpretations in the reporting of EPS. The application of the future expectation exception depended on the materiality of the expected dilution. The exception was invoked when material future dilution was expected, but not when immaterial future dilution was expected. The aggregate approach to the no anti-dilutive security provision was favored, but only for the calculation of PEPS. No one approach was favored for FDEPS computations. The opposite situation occurred for the warrant/option dilution determination provision. No technique was favored for the calculation of PEPS; however, utilization of year-end market prices was preferred for the FDEPS computations. The results of this study indicate that, after almost 20 years, a set of consensus interpretations of the provisions of APB 15 has not yet been achieved. The findings imply that EPS reflects the preparer's individual interpretational approach rather than a uniform, consistent profession-wide approach. As a result, the comparability of the reported EPS figures across companies does not exist.

Pages

173

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