CASE 16-4

Buckeyes Apparel Inc. (BA) is a retailer of sports apparel and footwear. BAs operations are

based in Columbus, Ohio, with retail stores located throughout the country. In an effort to

motivate certain members of senior management to execute consistently with BAs long-term

financial performance plan, it decided to issue performance-based restricted stock units (RSUs)

on January 1, 2014.

RSUs are a form of compensation offered by an employer in the form of company stock. These

shares of company stock are restricted in that they vest only after certain conditions

(restrictions) are met. The shares are earned or vested based on a vesting schedule consistent

with the satisfaction of these conditions. Vesting schedules are specific to each award and can be

based on various conditions such as service (remaining with the employer for a certain period of

time), performance milestones (such as meeting sales goals), or a combination.

These RSUs cliff vest (shares vest at a point in time) on the basis of continued employment after

three years, with the number of RSUs earned and issued at the end of the three-year vesting

period, if any, dependent on two performance conditions:

1. Three-year average organic revenue growth.

2. Three-year average operating margin.

Since RA has not previously issued these types of awards, it does not have knowledge of the

relevant accounting literature and guidance on how these contingently issuable shares should be

accounted for in their diluted earnings per share (EPS) calculation. Accordingly, as BAs

external auditor, management has asked for your assistance with its financial statements as of

and for the year ended December 31, 2014.

Required: Analyze the above and prepare a one-page report (font 12 of Times New Roman;

short answers with bullet points are encouraged) addressing the following questions.

As of December 31, 2014:

1. What is the three-year average organic growth rate that BA should assume in determining the

number of potentially outstanding dilutive awards for purposes of calculating diluted EPS?

2. What is the three-year average operating margin that PA should assume in determining the

number of potentially outstanding dilutive awards for purposes of calculating diluted EPS?

Scenarios:

? For the year ended December 31, 2014, organic revenue increased 10 percent.

? For the year ended December 31, 2014, the operating margin was 40 percent.

? For the year ended December 31, 2014, organic revenue increased 20 percent on average the

previous three years.

? For the year ended December 31, 2014, the operating margin was 50 percent on average the

previous three years.

Which codifications would you use to answer this?

45-53

In some cases, the number of shares contingently issuable may depend on both future earnings and future prices of the shares. In that case, the determination of the number of shares included in diluted EPS shall be based on both conditions, that is, earnings to date and current market priceas they exist at the end of each reporting period. If both conditions are not met at the end of the reporting period, no contingently issuable shares shall be included in diluted EPS.

45-28

The provisions in paragraphs 260-10-45-28A through 45-31 apply to share-based awards issued to employees under a share-based compensation arrangement and to other than employees in exchange for goods and services.

45-28A

Awards of share options and nonvested shares (as defined in Topic 718) to be issued to an employee under a share-based compensation arrangement are considered options for purposes of computing diluted EPS. Such share-based awards shall be considered to be outstanding as of the grant date for purposes of computing diluted EPS even though their exercise may be contingent upon vesting. Those share-based awards are included in the diluted EPS computation even if the employee may not receive (or be able to sell) the stock until some future date. Accordingly, all shares to be issued shall be included in computing diluted EPS if the effect is dilutive. The dilutive effect of share-based compensation arrangements shall be computed using the treasury stock method. If the equity share options or other equity instruments are outstanding for only part of a period, the shares issuable shall be weighted to reflect the portion of the period during which the equity instruments were outstanding. See Example 8 (paragraph 260-10-55-68).

45-28B

In applying the treasury stock method, all dilutive potential common shares, regardless of whether they are exercisable, are treated as if they had been exercised. The treasury stock method assumes that the proceeds upon exercise are used to repurchase the entity's stock, reducing the number of shares to be added to outstanding common stock in computing EPS.

45-32

Fixed employee stock options (fixed awards) and nonvested stock (including restricted stock) shall be included in the computation of diluted EPS based on the provisions for options and warrants in paragraphs 260-10-45-22 through 45-27. Even though their issuance may be contingent upon vesting, they shall not be considered to be contingently issuable shares (see Section 815-15-55 and paragraph 260-10-45-48) . However, because issuance of performance-based stock options (and performance-based nonvested stock) is contingent upon satisfying conditions in addition to the mere passage of time, those options and nonvested stock shall be considered to be contingently issuable shares in the computation of diluted EPS. A distinction shall be made only between time-related contingencies and contingencies requiring specific achievement.

45-45

If an entity issues a contract that may be settled in common stock or in cash at the election of either the entity or the holder, the determination of whether that contract shall be reflected in the computation of diluted EPS shall be made based on the facts available each period.It shall be presumed that the contract will be settled in common stock and the resulting potential common shares included in diluted EPS (in accordance with the relevant provisions of this Topic) if the effect is more dilutive. Stock-based compensation arrangements that are payable in common stock or in cash at the election of either the entity or the employee shall be accounted for pursuant to this paragraph and the following paragraph. An example of such a contract is a written put option that gives the holder a choice of settling in common stock or in cash.

45-48

Shares whose issuance is contingent upon the satisfaction of certain conditions shall be considered outstanding and included in the computation of diluted EPS as follows:

a. If all necessary conditions have been satisfied by the end of the period (the events have occurred), those shares shall be included as of the beginning of the period in which the conditions were satisfied (or as of the date of the contingent stock agreement, if later).

b. If all necessary conditions have not been satisfied by the end of the period, the number of contingently issuable shares included in diluted EPS shall be based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period (for example, the number of shares that would be issuable based on current period earnings or period-end market price) and if the result would be dilutive. Those contingently issuable shares shall be included in the denominator of diluted EPS as of the beginning of the period (or as of the date of the contingent stock agreement, if later).