Ordinary share, potential ordinary share, dilution

Learning objectives

• Distinguish an ordinary share, a potential ordinary share (convertible instrument, option, warrant, contingently issuable share) and a preference share.L1, L2, L3
• Explain dilution (a reduction in earnings per share or an increase in loss per share) and antidilution.L2, L3

Normative references

• IAS 33 §5Definitions. Ordinary share: an equity instrument that is subordinate to all other classes of equity instruments. Potential ordinary share: a financial instrument or other contract that may entitle its holder to ordinary shares. Options, warrants and their equivalents: instruments that give the holder the right to purchase ordinary shares. Contingent share agreement: an agreement to issue shares that depends on the satisfaction of specified conditions; contingently issuable ordinary shares: shares issuable for little or no cash or other consideration upon the satisfaction of those conditions. Dilution: a reduction in earnings per share (or an increase in loss per share) resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions; antidilution: the opposite effect. Put option on ordinary shares: a contract that gives the holder the right to sell ordinary shares at a specified price for a given period.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• A company has issued a bond convertible into ordinary shares, not yet converted. How does IAS 33 characterise this instrument?L1
• Cormeil SA, a listed company, has the following instruments in issue. Which of them are potential ordinary shares under IAS 33? More than one answer is possible.L3