Convertible instruments

Learning objectives

• Calculate the shares and the earnings adjustment for a convertible instrument deemed to have been converted at the beginning of the period or, if later, at its date of issue.L3, L4

Normative references

• IAS 33 §33For diluted earnings per share, basic earnings are adjusted for the after-tax effect of dividends, interest and any other changes in income or expense that would no longer arise if the dilutive potential ordinary shares were converted into ordinary shares (for example, after-tax interest saved on convertible debt).
• IAS 33 §36Dilutive potential ordinary shares are deemed to have been converted into ordinary shares at the beginning of the period or, if later, at the date of issue of the potential ordinary shares; the number of shares used is the weighted average number plus the shares that would be issued on conversion.

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

3 questions

• At 1 January, Arles SA already held a convertible bond issued two years earlier, convertible into {conversion_shares} ordinary shares. For the year, the profit attributable to ordinary equity holders is {earnings_ordinary} (in euros) and the weighted average number of shares is {weighted_shares}. The bond's interest, after tax, is {after_tax_interest}. The bond is dilutive (case datum). Calculate the diluted numerator, the diluted number of shares and diluted earnings per share. Round earnings per share to two decimals (case convention).L3
• On 1 July, Pontoise SA issues a bond convertible into {conversion_shares} ordinary shares. For the year ended 31 December, the profit attributable to ordinary equity holders is {earnings_ordinary} (in euros) and the weighted average number of shares is {weighted_shares}. The bond's interest expense for the year, after tax, is {after_tax_interest}. The bond is dilutive (case datum) and remains outstanding {months_since_issue} months (weighting in months). Calculate the weighted conversion shares and then diluted earnings per share. Round earnings per share to two decimals (case convention).L4
• In the working note of Ormes SA on diluted earnings, which sentence about a convertible bond issued on 1 July is incorrect?L4