Summary of Statement No. 85

Yield Test for Determining whether a Convertible Security is a Common Stock Equivalent—an amendment of APB Opinion No. 15 (Issued 3/85)


This Statement amends APB Opinion No. 15, Earnings per Share, to replace the "cash yield test" with an "effective yield test" for determining whether convertible securities are common stock equivalents in the primary earnings per share computation.

The Board was asked to consider how the provisions of Opinion 15 should be applied to zero coupon convertible bonds. Since such bonds have no annual cash interest payments, application of the "cash yield test" in Opinion 15 always results in these securities' being considered common stock equivalents. This amendment applies the common stock equivalency test in a manner consistent with the objective of Opinion 15 for a convertible security that pays much or all of its yield at maturity.

The provisions of this Statement shall be applied to convertible securities issued after March 31, 1985, with earlier application encouraged in financial statements that have not previously been issued. Retroactive application for transactions occurring during periods for which financial statements have been issued is permitted.