We exclude the effect of these periodic remeasurements from our pro forma net income loss because the ultimate cash effect resulting from changes in exchange rates is inherently uncertain. These gains or charges would only affect near-term cash flows if we redeem or, in certain cases, restructure, our 6. Because these charges and gains vary based on exchange rates between the U. Dollar and Euro, these amounts are beyond our immediate control and are difficult to predict for future periods.

Additionally, we exclude gains or charges associated with remeasurements of foreign-currency denominated intercompany balances. We exclude these amounts because they are beyond our immediate control and difficult to predict for future periods.

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We exclude equity in losses of equity-method investees, net, because it generates potential non-cash gains or losses, which are based on the financial results of other companies that we do not manage or control and are difficult to predict. In addition, we believe these non-cash gains and losses are not indicative of our financial or operating performance.

Finally, in recent quarters, these amounts represented insignificant charges and, absent future investments, we expect this trend to continue. In the third quarter , we recorded no equity method losses or gains. Cumulative Effect of Change in Accounting Principle.

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We exclude cumulative effect of change in accounting principle because it generates non-cash charges, which we believe are not indicative of our financial or operating performance. Free Cash Flow.

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In limited circumstances where proceeds from sales of fixed assets exceed purchases, free cash flow would exceed cash flow from operations. However, since we do not anticipate selling significant portions of fixed assets, we expect free cash flow to be less than operating cash flows. Limitations of Free Cash Flow. Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. For example, free cash flow does not incorporate payments made on capital lease obligations.

Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows. Stock-based compensation;. Amortization of other intangibles; and. These are usually shares given to employees as compensation. Out of the money options and convertible debt where conversion is unlikely are also excluded from the calculation. Finally, for convertible bonds, the share count is adjusted by the number of new shares resulting from the exchange of bonds into equity.

The net income used for EPS calculations should be after any preferred dividend and after any allocation of profits to non-controlling shareholders. To calculate diluted earnings, the net income is increased by the post-tax interest saved as a result of the convertible debt becoming equity:. The impact of options to the net income is always zero because of the assumption that monies raised is used to buy back stock. The next step is to calculate dilution from options.

In the money options are defined as the holder having the right to buy the security below its current market price. Below shows the calculation for the treasury stock method:.

The number of shares outstanding now needs to be adjusted to calculate the basic and diluted WASO. For 4 weeks receive unlimited Premium digital access to the FT's trusted, award-winning business news. Digital Be informed with the essential news and opinion. Check availability.

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