Contracts settled in shares or cash

Learning objectives

• Justify presuming settlement in shares for a contract that may be settled in ordinary shares or in cash.L4

Normative references

• IAS 33 §58Contract that may be settled in ordinary shares or in cash at the entity's option: the entity presumes that the contract will be settled in shares and includes the resulting potential ordinary shares in diluted earnings per share if the effect is dilutive; the paragraph makes no provision for rebutting this presumption. The adjustment to the numerator for a contract presented as an asset, a liability, or with an equity and a liability component falls within para. 59; a contract that may be settled at the holder's option falls within para. 60 (the more dilutive of the two settlement methods is used).

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

1 question

• Alta SA has entered into a contract with a bank that may be settled, at the issuer's option, in ordinary shares or in cash. Management intends to settle it in cash and argues that it must therefore be excluded from the calculation of diluted earnings per share. The contract has an equity component and a liability component. Write a note concluding on the treatment of this contract in diluted earnings per share, separating case facts, rule and judgement.L4