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EARNINGS PER

SHARE
PART 2: DILUTED EARNINGS PER
SHARE
CONCEPT OF POTENTIAL
ORDINARY SHARES
A financial instrument or other contract
that may entitle its holder to ordinary
shares
EXAMPLES OF POS
Convertible instruments
Options and warrants
Shares that would be issued upon the
satisfaction of conditions resulting from
contractual arrangements
WHICH POTENTIAL
SHARES ARE CONSIDERED?
Those that reduce earnings per share or
increase loss per share
DILUTIVE SHARES
COMPUTATION
Based on the assumption that the
dilutive potential ordinary shares are
converted or exercised
AS IF
Convertible preference shares are
converted
Convertible bonds are converted
Options and warrants are exercised


AS OF THE DATE THEY BECOME OUTSTANDING


REGARDLESS OF THE DATE OF THEIR
ACTUAL CONVERSION OR EXERCISE
FOR EXAMPLE
Convertible bonds outstanding as of
January 1 are assumed to have been
converted on January 1

Options issued as of April 1 are assumed to
have been exercised as of April 1
FORMULA
Convertible PS
Assumed to have been converted, thus
no adjustment to profit or loss for any
dividends on the convertible preference
shares
The additional ordinary shares from the
assumed conversion is added to the
denominator figure
Example 1 Diluted EPS,
Convertible PS
ABC Co. had the following capital structure during 2013 and
2014:
Convertible Preference shares, P10 par, 6% cumulative 50,000
shares issued and outstanding --- P500,000
Ordinary shares, P10 par, 200,000 shares issued and
outstanding --- P2,000,000
ABC reported a profit after tax of P1,200,000 for the year
ended December 31, 2014. ABC paid no preferred dividends
during 2013 and paid P15,000 in preferred dividends during
2014. Each preference share is convertible into two ordinary
shares
Example 2 DEPS > BEPS
On December 31, 2013, ABC Co. had 200,000 ordinary
shares outstanding with a par value of P100 per share. In
addition, ABC had convertible preference shares which are
convertible into 30,000 ordinary shares. On December 31,
2013, ABC reported profit of P1,200,000 and declared and
paid P200,000 dividends to preference shares.
What amount of earnings per share should ABC Co.
report in its December 31, 2013 statement of profit or loss?
Convertible Bonds
Since convertible bonds are assumed to have been
converted, interest expense (net of tax) for such
instrument is added back to profit or loss.
It is treated as if it was converted from issuance, thus it is
but logical to treat interest on the instrument as if it were
not incurred.
Incremental shares arising from the assumed conversion of
the convertible bonds are added to the denominator of the
diluted EPS formula
Example 1 Diluted EPS,
Convertible Bonds
ABC Co. had the following share instrument outstanding all
throughout 2013:
10% Convertible bonds payable issued at face amount, each
P1,000 bond is convertible into 30 ordinary shares ---
P4,000,000
Ordinary shares, P10 par, 200,000 shares issued and
outstanding --- P2,000,000
Profit for the year amounted to P1,200,000. ABCs tax rate is
30%.
Compute BEPS and DEPS.
Example 2 Diluted EPS,
Convertible Bonds Actual Conversion
ABC Co. had 200,000 ordinary shares
outstanding on January 1, 2013. In addition,
as of January 1, 2013, the entity had issued
5,000 convertible 10% bonds with P1,000 face
amount. The bonds are convertible into
100,000 ordinary shares. ABC has no other
potentially dilutive securities. The bonds were
converted on October 1, 2013. Profit for the
year was P1,200,000. Income tax rate is 30%
Compute BEPS and DEPS.
Example 3 Diluted EPS,
Convertible Bonds Effective Interest Method
ABC Co. had 200,000 ordinary shares
outstanding on January 1, 2013. Also on
January 1, 2013, ABC issued P1,000,000 face
amount convertible bonds with face rate of
10% due in 3 years. Without the conversion
option, the bonds are selling at a market rate
of interest of 12%. The bonds are convertible
into 50,000 ordinary shares. Profit for 2013 is
P1,200,000. Income tax rate is 30%.
Compute BEPS and DEPS.