Contingently issuable shares (diluted)

Learning objectives

• Determine the number of contingently issuable shares included in diluted earnings per share (conditions assessed as if the end of the reporting period were the end of the contingency period).L3, L4

Normative references

• IAS 33 §52Contingently issuable shares (diluted earnings per share): when the conditions are satisfied, the shares are included from the beginning of the period (or from the date of the agreement, if later); when they are not, the number included is the number of shares that would be issuable if the end of the reporting period were the end of the contingency period; restatement is not permitted if the conditions are not met when the contingency period expires.
• IAS 33 §54Number of contingently issuable shares depending on the future market price of the shares: if the effect is dilutive, the diluted calculation is based on the number of shares that would be issued if the market price at the end of the reporting period were the market price at the end of the contingency period; for a condition based on an average of market prices over a period extending beyond the end of the reporting period, the average for the period that has elapsed is used; these shares are not included in basic earnings per share until the end of the contingency period.

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

3 questions

• For the year, Tourny SA has a weighted average number of shares of {weighted_shares}. An agreement entered into before the start of the year (in force {months_of_contract} months of the year) provides for two tranches of shares to be issued at the end of a two-year contingency period, for little or no consideration: {tranche_a_shares} shares if cumulative revenue reaches a target; {tranche_b_shares} shares if cumulative operating profit reaches another target. At the end of the first year, cumulative revenue already reaches the target of tranche A; cumulative operating profit does not reach that of tranche B. Calculate the contingent shares to include in diluted earnings, then the number of shares in the diluted denominator (excluding other instruments).L3
• Bonnet SA has a profit attributable to ordinary equity holders of {earnings_ordinary} (in euros) and a weighted average number of shares of {weighted_shares}. An agreement in force all year, with a contingency period that has not ended, provides for the following for little or no consideration: {tranche1_shares} shares if cumulative profit reaches a target, attained at the level of the reporting date; and {tranche2_shares} shares if the share price is at least {required_price} at the end of the contingency period, the closing price being {closing_price}. Calculate the number of shares in the diluted denominator (excluding other instruments) and diluted earnings per share. Round earnings per share to two decimals (case convention).L4
• Latour SA must deliver 300,000 ordinary shares, for little or no consideration, if its cumulative operating profit over three years exceeds 3,000,000. At the end of the first year the cumulative figure is 3,200,000; management expects losses in the next two years that would bring the final cumulative figure below the target. The profit attributable to ordinary equity holders is 4,500,000 for 3,000,000 shares on a weighted average basis. Write a note determining whether these shares enter diluted earnings per share, separating case facts, rule and judgement.L4