Options and warrants: the treasury share method

Learning objectives

• Calculate the incremental shares from dilutive options and warrants using the treasury stock method at the average market price.L3, L4
• Determine whether options are dilutive (exercise price lower than the average market price).L3

Normative references

• IAS 33 §45For diluted earnings per share, the entity assumes the exercise of dilutive options and warrants; the assumed proceeds are regarded as having been received from the issue of ordinary shares at the average market price during the period (treasury stock method); the difference between the number of shares issued and the number that would have been issued at that price is treated as an issue for no consideration.
• IAS 33 §46Dilutive options and warrants: those that would result in the issue of ordinary shares for less than the average market price during the period; the amount of the dilution is the average market price less the issue price; the instrument is analysed as a contract to issue shares at the average market price (no effect) and a contract to issue the remaining shares for no consideration (dilutive). The "in the money" condition (average market price above the exercise price) is set out in para. 47.

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

3 questions

• During the year, Olivet SA has {number_of_options} options outstanding, each entitling its holder to one ordinary share at an exercise price of {exercise_price} (in euros). The average market price of the share during the year is {average_price}. Using the treasury stock method, calculate the number of incremental shares to add to the denominator of diluted earnings.L3
• Savoie SA has issued options on its own shares: {number_of_options} options, each entitling its holder to one ordinary share at an exercise price of {exercise_price} (in euros). The average market price for the year is {average_price}. The profit attributable to ordinary equity holders is {earnings_ordinary} and the weighted average number of shares is {weighted_shares}; the options have no effect on the numerator. Calculate the incremental shares using the treasury stock method, then diluted earnings per share. Round earnings per share to two decimals (case convention).L4
• Cormier SA has two series of options on its own shares, each option entitling its holder to one ordinary share. Series A: {series_a_options} options at an exercise price of {series_a_price} (in euros). Series B: {series_b_options} options at an exercise price of {series_b_price}. The average market price for the year is {average_price}. Each series is considered separately. Calculate the total number of incremental shares to be included for diluted earnings.L4