BASIC VS DILUTED

DILUTED EARNINGS PER SHARE

• A company may issue certain types of financial instruments
that give rights to convert or exercise into ordinary shares at a
future date and these are known as potential ordinary shares.

• Examples of potential ordinary shares are:

➢ Share warrant and options
➢ Convertible debenture/Bonds/Preference shares or
Loan
➢ Rights granted to receive shares under employee share
option schemes
➢ Shares issued upon the satisfaction of specified
conditions
• These financial instruments issued have a potential dilutive
effect on EPS.
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DEFINITION
□ Potential o r di n a r y s h a r e s (POS) is a financial
instrument or other contract that may entitle its
holder to own OS in the future (e.g: convertible
bonds, convertible PS, options and warrants).

□ O pt i o n s, w a r r a n t s are financial instruments or

contracts that may entitle their holder to ordinary shares.
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DILUTED EARNINGS PER SHARE

• D i l u t i o n is a reduction in EPS resulting from the assumption
that convertible instruments are converted, options or warrants
are exercised, or O S are issued upon the satisfaction of
specified conditions.
• Potential ordinary shares are treated as dilutive only when their
conversion to ordinary shares decreases EPS. However, if EPS
increase, it is considered as anti-dilutive.
• A n enterprise with POS that are dilutive in nature is required to
present both basic EPS and diluted EPS in the financial
statement.

↓ in EPS or ↑ in loss per share = Dilution

↑ in EPS or ↓ in loss per share = Anti-dilutive
 MEASUREMENT -
DILUTED EARNINGS PER SHARE
• i t i s n e c e s s a r y to adj ust b o t h t he num erat or
a n d denom in at or o f the BEPS f o r m u l a .

Diluted Earnings Per Share =

Profit as per BEPS + net of tax savings on assumed

conversion
WANOS as per BEPS + the number of shares issuable on
assumed conversion
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A dju st Numerator for Convertible

financial i n s t r u m e n t s
The PAT should be adjusted by a d d i n g back:
▪ Interest o n debenture for convertible
debenture
✔ since convertible debenture is deemed to have
been converted into OS, interest on debenture
would not have to be paid
▪ Preference dividend for convertible
preference s h a r e s
✔ Need not deduct preference dividend because
convertible PS is deemed to have been converted
into OS.
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A d j u s t D e n o m i n a t o r for
Convertible financial i n s t r u m e n t s

□ Assumption of conversion date is important

because it effects calculation of WANOS

□ Assumptions of conversion date:

□ If issued earlier than current period,
assume conversion on the first day of period
□ If issued d u r i n g current period, assume
conversion on date of issue
DILUTED EARNINGS PER SHARE
3 circumstances of potential ordinary shares are:-

1. When companies have issued Convertible Preference

Share
• Preference shares will be converted to ordinary shares.
• There will be a saving in preference dividend - adjustment to
earnings.
• The number of shares will increase.

2. When companies have issued Convertible loan stock

• The loan stock will be converted to ordinary shares.
• There will be interest savings - adjustment to earnings.
• The number of shares will increase.
DILUTED EARNINGS PER SHARE
3. Share option & warrants
• Gives the holder the right to purchase for ordinary shares,
and the company will fix the exercise price (EP).
• Holders will be inclined to exercise their rights if the EP <
MP. Options are dilutive because of the EP < MP.
• If the EP > MP, Options/Warrants to be ignore in the DEPS
computation.

Additional shares to be included

= shares option * (MP – EP)/MP * period converted/12
 Determining the order in which to include
Dilutive instruments

1) Options and warrantsare generally included first

because they do not affect the numerator of the
calculation.

2) Each issue or series of potential ordinary shares is

considered in sequence, from the most dilutive to the
least dilutive or dilutive and anti-dilutive.

3) Exclude the anti-dilutive in calculating DEPS.

 MORE THAN ONE TYPE OF
POTENTIAL ORDINARY SHARE
• Determine their dilutive effect separately.
• They are to be considered in a sequence from:

MOST DILUTIVE
Potential ordinary shares which result in the lowest
earnings per incremental share.

LEAST DILUTIVE
Potential ordinary shares which result in the highest
earnings per incremental share.
 LIMITATIONS OF EPS
1. EPS does not take into account the market price of a
stock and its use is limited to measure the earning
consistency of the company.

2. An increase in EPS does not necessarily show an

increase in earnings but may be due to the no of ordinary
shares and potential ordinary shares.

3. EPS does not reveal how much dividend is paid to the

owners or how much earnings are retained in the business.
It only shows how much earnings theoretically belong to
the ordinary shareholders (per share basis).
a) The amounts used as the numerators in calculating basic EPS
and DEPS and a reconciliation of those amounts to profit or loss
attributable to the parent entity for the period should be
disclosed.
b) The weighted average number of ordinary shares used as a
denominator in calculating basic EPS and DEPS, and a
reconciliation of these denominators.
c) The instruments that could potentially dilute basic EPS in the
future but were not included in the calculation of DEPS because
they are anti-dilutive for the period.
d) A description of ordinary shares transactions or potential
ordinary share transactions other than those accounted under
MFRS133 should be disclosed if:
i. Occur before the end of the reporting period.
ii. Occur after the end of the reporting period, but it would significantly
change the number of ordinary shares or potential ordinary shares
at the end of the accounting period.
 EXERCISES
1. EXAMPLE 1 - No conversion

2. EXAMPLE 2 - Conversion at the beginning of

the reporting period

3. EXAMPLE 3 - Conversion during the year

4. EXAMPLE 4 - Conversion on the last day of

the reporting period