Earnings Per Share

Diluted EPS
Potential Shares (Options; Convertible
Debentures and Convertible Preference
Shares)
 Diluted EPS
A dilution is defined as:
A reduction in earning per share, or
An increase in a loss per share.
Resulting from the assumption that:
• Convertible instruments are converted; or
• Options/ warrants are exercised; or
• Ordinary shares are issued upon the
satisfaction of specified conditions
 Example 19
Diluted EPS

Basic earning 20x5 R500 000

1 200 000 ordinary shares in issue

300 000 options granted to were issued to the directors for no

value

Calculate EPS and DEOPS

 Example 19
• Diluted EPS
Example 19 Ordinary

Weighted Average

Actual Diluted

Opening balance 1 200 000 1 200 000

Issue for value 0 300 000

1 200 000 1 500 000

Issue for no value 0 0

Closing balance 1 200 000 1 500 000

 Diluted EPS
Options Convertible Convertible
Debentures Preference
Shares
Effect on No effect +Finance + Dividends
earnings costs saved saved if
net of tax treated as
finance cost

Number of + number of +Number of +Number of

shares bonus shares/ possible possible
not for value extra/new extra/new
shares shares
 Potential shares
A potential ordinary share is defined as:
• A financial instrument or
other contract
• that may entitle a holder to ordinary shares
• Potential shares may cause a dilution in EPS
 Potential Shares Dilution
Adjustment OPTIONS CONVERTIBLE CONVERTIBL
DEBENTURES E
PREFRENCE
SHARES

Earnings No effect Add finance Add

No Costs saved dividend if
Adjust. net of tax treated as
finance cost

Number Add Add possible Add possible

Of number of number of new number of
Shares bonus/not shares new shares
for value
 Example 21
Convertible debentures

Profit for the year is R279 000 afterR30 000 debenture interest before tax

Tax rate is 30 %
100 000 ordinary shares @ R2 each

200 000 convertible debentures (one ordinary shares per debenture) at 2 each

Calculate the diluted basic eps and the diuted eps

 Example 21

Example 21 Convertible debentures

Profit for the year  

Preference dividend  
Basic Earnings  
Adjustments  
Finance Cost avoided  
Diluted Earnings  
 Example 22
Convertible Preference shares
Profit from operations 465 000
Finance costs -60 000
Profit before tax 405 000
Income tax expense -121 500
Profit for the period 283 500

200 000 ords @ R2; 100 000 convertible 20 % debs

Convert the option of deb s/h 1 to 1 basis
Mandatory pref div R40 0000/ 30 % tax rate/ pred dix not tax deductible
A: prefs are liability R60 000 bank interest;R40 0000 pref div is R45 000 interest use
the effective interest rate
B Prefs are equity R60 000 bank interest
 Example 22

Example 21 Convertible preference

Profit for the year  Liability Equity
Preference
dividend  
Basic Earnings  
Adjustments  
Finance Cost
avoided  
Diluted Earnings  
 Example 23
Contingent shares

Airway Ltd has 1 million ordinary shares issued 20x4

Airway Ltd on 2 January 20x5 bought 100 % of Radio Ltd by an issue of extra 1 million
ordinary shares shares

Another 500 000 ordinary shares are contingent on Radio Ltd generating over a total
of R100 million profits over the next three years
Airway Ltd earned R500 million profits in 20x5 (20x4: R400 million)

Radio Ltd earned R200 million profits in 20x5

Calculate for both years the basic and diluted eps

 Disclosure
• Pages 1168 and 1169
• EPS and DEPS at the bottom of the statement of comprehensive
income (comparatives=current year and prior year.
 2016 2015
 EPS xxxx xxx
 DEPS xxxx xxx
• EPS Note to the annual financial statement distinguishing between
the current year and prior year:
 Earnings 2016 Rxxx (2015: Rxx)
 Weighted number of shares 2016: XXXX (2015: xxxx)
• Reconciliation page 1169