Diluted Earnings Per Share (diluted EPS) CALCULATES a company’s earnings per share if all convertible securities were converted.
Table of Contents
- Diluted Earnings Per Share (EPS)
- Diluted EPS Formula
- Diluted Earnings Per Share – Potential Ordinary Shares
- How to Calculate Diluted EPS?
- Options, Warrants and their Equivalents
- Contingently Issuable Shares
Diluted EPS INCLUDES dilutive potential ordinary shares (such as options and convertible instruments) on fulfillment of certain criteria.
Except for Basic EPS, an entity should also DISCLOSE diluted EPS.
Diluted EPS Formula
|Diluted Earnings Per Share|
= Adjusted Net Profit/(Loss) Attributable to Ordinary Shareholders / Adjusted Weighted Average Number of Ordinary Shares Outstanding During the Period
[Note: Adjusted for the effects of all dilutive potential ordinary shares.]
|– Any dividends on diluted potential ordinary shares|
– Any interest recognized for the dilutive potential ordinary shares
|– No. of ordinary shares issued on conversion of all dilutive potential ordinary shares|
IAS 33 defines them as some contracts or securities that are NOT ordinary shares but can be converted later on i.e.
- Loans convertible to ordinary shares
- Convertible preference shares
- Share warrants and options
- Employment plans that grant the employees some ordinary shares as their remuneration (IFRS 2)
|Two-Fold Impact on ‘EPS’|
They could be affected by saving some expenses on potential ordinary shares e.g. when some loan converts into shares, interest on loan no longer paid.
|(b) Shares |
When the potential ordinary shares are converted into ordinary shares, the no. of shares increase and dilute the EPS.
Before calculating diluted EPS, it needs to be determined whether the potential ordinary shares are dilutive or not:
|Include in diluted EPS.||Ignore.|
|Following Points Need to be Considered in Connection with Diluted EPS:|
|(1). It should be assumed that dilutive potential ordinary shares were converted into ordinary shares at LATER of:|
– Start of the reporting period; OR
– Actual date of issue of dilutive potential ordinary shares.
|(2). Diluted EPS computation assumes the most advantageous conversion/exercise rate from the perspective of the holder of potential ordinary shares.|
|(3). Potential ordinary shares are weighted for the period they were outstanding. |
If potential ordinary shares are canceled/lapsed/converted into ordinary shares during the reporting period, they are included in the computation of diluted EPS only for the portion of the period during which they were outstanding i.e.
– From the beginning of the reporting period;
– To the date of conversion from the date of conversion
The resulting ordinary shares are INCLUDED in both basic and diluted EPS.
|(4). In considering whether potential ordinary shares are dilutive or anti-dilutive, each issue or series of potential ordinary shares is considered separately, NOT in aggregate.|
The sequence in which potential ordinary shares are considered may affect whether or not they are dilutive.
Therefore, in order to MAXIMIZE the dilution of basic EPS, each issue or series of potential ordinary shares is considered in sequence from the most dilutive to the least dilutive.
|(5). The net profit from continuing ordinary activities is the ‘Control Number’ used to establish whether potential ordinary shares are dilutive or anti-dilutive.|
The net profit from continuing ordinary activities is the net profit from ordinary activities after DEDUCTING preference dividends and after excluding items relating to discontinued operations.
How to Calculate Diluted EPS?
IAS 33 requires ignoring antidilutive shares – you just PRESENT the effect of dilutive shares.
Diluted EPS is measured exactly the same as for Basic EPS, the only DIFFERENCE is that both ‘Earnings‘ and ‘Number of Shares‘ must be adjusted for the effect of dilutive potential ordinary shares.
|The effects of dilutive potential ordinary shares on earnings could be:|
– Dividends on dilutive potential ordinary shares that were deducted to arrive at earnings for basic EPS;
– Interest on dilutive potential ordinary shares (e.g. convertible loan);
– Any other changes in income on expenses resulting from the conversion of the dilutive potential ordinary shares.
|No. of Shares|
|The number of ordinary shares is the weighted average number of ordinary shares calculated for basic EPS PLUS the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.|
Options, Warrants and their Equivalents
Options, warrants and their equivalents are financial instruments that give the holder the right to purchase ordinary shares.
For calculation of Diluted Earnings Per Share (Diluted EPS), it is assumed that:
- The options and warrants are exercised; AND
- The assumed proceeds would have been received from the issue of shares at the average market price of ordinary shares during the period.
Options, warrants and other share purchase arrangements are dilutive when they would result in the issue of ordinary shares for LESS than the average market price of ordinary shares during the period.
|The Amount of the Dilution is the Average Market Price of Ordinary Shares During the Period MINUS Issue Price.|
In Order to Calculate Diluted EPS:
|– A contract to issue a certain number of ordinary shares at their average Market Price during the period.|
These shares are fairly priced and are neither dilutive nor anti-dilutive. They are IGNORED in the computation of Diluted Earnings Per Share (Diluted EPS).
– A contract to issue the remaining ordinary shares for no consideration. Such ordinary shares generate no proceeds and have NO EFFECT on the net profit attributable to ordinary shares outstanding.
Therefore, such shares are dilutive and they are added to the number of ordinary shares outstanding in the computation of diluted EPS.
These are ordinary shares issue-able for little or no cash or other consideration upon the satisfaction of specified conditions in a contingent share agreement.
1. IAS 33 Guidelines
|For Calculation of Basic EPS||For Calculation of Diluted EPS|
|No impact on the calculation of Basic EPS until the shares are actually issued.||Treat the end of the reporting period as the end of the contingently period.|
– If condition(s) are met, take into account such shares in determining Diluted EPS.
– If condition(s) are NOT met, do not take into account such shares in determining Diluted EPS.
1.1 Conditions Related to Earnings
|If attainment or maintenance of a specified amount of earnings for a period is the condition for the contingent issue:|
– The calculation of Diluted EPS is based on the number of ordinary shares that would be issued if the amount of earnings at the end of the reporting period were the amount of earnings at the end of the contingency period.
|If the achievement of the target market price of shares is the condition for the contingent issue:|
– The calculation of Diluted EPS is based on the number of ordinary shares that would be issued if the market price at the end of the reporting period were the market price at the end of the contingency period.
– If the condition is based on an average of market prices over a period of time that extends beyond the end of the reporting period, the average for the period of time that has lapsed is used.
1.3 Any Other Condition
|If contingently issuable shares depend on a condition OTHER than earnings or market price:|
– The contingently issuable ordinary shares are included in the calculation of Diluted EPS according to the status at the end of the reporting period.
Diluted Earnings Per Share Presented by International Accounting Standard (IAS 33) was REISSUED in December 2003 and applies to annual periods beginning on or after 1 January 2005.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)