DILUTED EARNINGS PER SHARE

DILUTED EARNINGS PER SHARE (DILUTED EPS)

Diluted EPS is an EPS reflecting maximum dilutions that would have resulted from potential ordinary
shares.

Simply stated, potential ordinary shares are considered when computing for diluted EPS only when they
are dilutive. They are dilutive if, when exercised, they decrease basic earnings per share or increase basic
loss per share.

If potential ordinary shares are anti-dilutive (opposite of dilution), then only BEPS shall be presented.

Potential ordinary shares are financial instruments or other contracts that may entitle its holder to ordinary
shares. Examples are:

 Convertible preference shares

 Convertible bonds
 Options, warrants and their equivalents
Computing diluted earnings per share uses the "as-if assumption"; As if the convertible preference shares
or convertible bonds have been converted or as if the options and warrants have been exercised.

The conversion or exercise is assumed to have taken place on the date the potential ordinary shares first
became outstanding, regardless of the date of actual conversion or exercise.

CONVERTIBLE BONDS
Diluted EPS is computed as:
Diluted EPS = Profit or Loss –Preferred Dividends + Interest Expense, net of tax
Weighted average OS plus potential OS
As you can see, based on the computation, the convertible bonds were assumed to have been converted
into additional ordinary shares. Therefore, if that is the assumption, interest expense after tax incurred on
the bonds are added back to profit or loss.
CONVERTIBLE PREFERENCE SHARES
Diluted EPS is computed as:

Diluted EPS = Profit or Loss

Weighted average OS plus potential OS
If there are convertible preference shares, the preference shares are assumed to be converted into ordinary
shares. Accordingly, the net income is not reduced by the amount of preference dividend. The number of
ordinary shares outstanding is increased by the number of ordinary shares that would have been issued
upon conversion of the preference shares.
NOTE: If the convertible preference shares were actually converted during the year, the dividends must
be declared before conversion to be deducted for BEPS purposes.

OPTIONS AND WARRANTS

Options and warrants are included in the computation of diluted earnings per share only when they are
dilutive. They are dilutive when the exercise price or option price is less than the average market price of
the ordinary share.

Diluted EPS is computed as:

Diluted EPS = Profit or Loss
Weighted average OS plus potential OS
In computing the potential ordinary shares for diluted EPS computation, the treasury share method is to
be used which assumes the following:

 The options or warrants are exercised.

 The proceeds received from the exercise are used to purchase treasury shares at the average
market price.
 The difference between treasury shares assumed to have been purchased and the option shares
represents the incremental shares or potential ordinary shares.
NOTE: Potential ordinary shares from options and warrants are averaged until the date of exercise only.

CONTINGENTLY ISSUABLE SHARES

Contingently issuable shares are ordinary shares issuable for a small or no cash consideration upon
satisfying specified conditions in a contingent share agreement.

These shares are averaged when the conditions have been satisfied.
MULTIPLE POTENTIAL ORDINARY SHARES
When there are two or more potential ordinary shares, they need to be ranked according to their dilutive
effect on basic EPS. The entity shall provide selection or combination of securities producing the lowest
EPS.

The following steps shall be followed in computing Diluted EPS:

STEP 1: Compute the Basic EPS
STEP 2: Rank securities according to which of them is most dilutive (i.e. producing the least incremental
EPS). They are included in the computation step by step according to their ranking.

Usually, the most dilutive securities are options and warrants since they affect only the denominator of
the formula but not the numerator. The following are the computation of the incremental EPS generated
by each security, to be used for their ranking

A. Options and warrants - When Exercise Price < Market Price

B. Convertible bonds - After tax interest expense ÷ Potential ordinary shares
C. Convertible preference shares - Preferred dividends ÷ Potential ordinary Shares

NOTE: If any time the diluted EPS exceeds the basic EPS, the entity discontinues considering further
potential ordinary shares and the lowest amount computed is the amount presented as diluted EPS.

PRESENTATION AND DISCLOSURE

An entity shall present on the face of the income statement basic and diluted earnings per share for
income or loss from continuing operations. An entity that reports a discontinued operation shall disclose
the basic and diluted amounts per share for the discontinued operation either on the face of the income
statement or in the notes to the statements.

When an entity presents both consolidated financial statements and separate financial statements, the
disclosures required need be presented only on the basis of the consolidated information.

An entity that chooses to disclose earnings per share on the separate financial statements shall present
such earnings per share information only on the face of the separate income statement. An entity shall not
present such earnings per share information on the consolidated financial statements.