An Empirical Evaluation of SFAS No. 55

Abstract

The Accounting Principles Board's Opinion No. 15 requires publicly held companies which have issued certain common stock equivalent securities to report two earnings-per-share figures, primary earnings per share and fully diluted earnings per share. Primary earnings per share is based on the number of common shares outstanding and the equivalent number of common shares of those securities which Opinion No. 15 defined to be substantively equivalent to common stock and which have a dilutive effect. Securities treated as common stock equivalents and included in the computation of primary earnings per share are those which have a . . cash yield to the holder at time of issuance significantly below what would be a comparable rate for a similar security of the issuer without the conversion option (APB [1969, para. 23]).1 APB Opinion No. 15 defined significantly below a comparable rate as less than 662/3 percent of the prime rate. The Financial Accounting Standards Board's SFAS No. 55 changed the cash yield definition to less than 662/3 percent of the average Aa corporate bond yield. The cash yield test involves a one-time classification determination made at the issuance date. The cash yield to prime interest rate test of common stock equivalency was initially selected as a means of measuring the value of a convertible bond derived from the related common stock; the selection was not conditioned on any assessment of the probability of future conversion.