DipIFR Syllabus C. Presentation and additional disclosures - IAS 33 Diluted EPS - Notes ^{7 / 8}

You show a Diluted EPS when you have either:

1. A convertible loan in your SFP

2. Options currently in issue

This is because these both of these will possibly increase the number of shares in the future and thus dilute EPS.

So it shows the worse case dilution that MAY happen to EPS in the future

Let's see how Convertible Loans and Options MAY affect Earnings and Shares

• Earnings

  The convertible loan will (once converted) increase earnings as interest will no longer have to be paid.

• Shares

  Obviously there will be more shares if the convertible loan gets converted or the share options get exercised

Now let's look how to calculate Diluted EPS due to the effects of:

1) The Convertible Loan
2) The Share Options

Convertible loan

Take the BASIC EPS and...

1. Add the interest saved (after tax) to the Earnings figure

   (as if the loan has now been converted and so no interest payable now)

2. Add the extra shares convertible to the Shares figure

   (as if the loan has now been converted into shares and so there are more shares in issue now)

Options

This is simply extra shares which you add to the Shares from the Basic EPS:

1. Step 1: Calculate the money the options will bring in

2. Step 2: Calculate how many shares this would normally buy

3. Step 3: Compare the Actual number of shares in the option to that in Step 2 (what we call "free" shares)

4. Step 4: Add This to Basic EPS

Illustration

Step 1 : Calculate the money the options will bring in
Step 2 : Calculate how many shares this would normally buy
Step 3 : Look at the number of shares given away in the option, compare it to those in step 2 and these are the “free shares”

We add the free shares to the SHARES figure from basic EPS.

Illustration

5% 800 convertible loan - each 100 can be converted into 20 shares (tax 30%)
100 share options @ $2 (MV $5)

How to calculate Interest Saved

5% x 800 = 40 x 70% (tax adjusted) = 28

How to calculate the extra convertible shares

800/100 x 20 = 160

How to calculate the free shares in share options

Cash in from option $200, this would normally mean the company issuing (200/5) 40 shares instead of the 100, so there has effectively been 60 shares issued for ‘free’. We use this figure in the diluted eps calculation.

An alternative calculation is:
100 x (5-2) / 5 = 60

Solution

Basic EPS     Convertible Loan       Share options
E 100               + 28
S 50               + 160               + 60

Diluted EPS = 128 / 270 = 0.47