Dilution test

Learning objectives

• Assess whether an instrument is dilutive or antidilutive on the basis of profit or loss from continuing operations attributable to the parent.L3, L4

Normative references

• IAS 33 §41Potential ordinary shares are treated as dilutive when, and only when, their conversion would decrease earnings per share or increase loss per share from continuing operations (the exclusion of antidilutive effects from the calculation is set out in para. 43).
• IAS 33 §42Profit or loss from continuing operations attributable to the parent, adjusted in accordance with para. 12 (hence after preference dividends) and excluding items relating to discontinued operations, is the control number used to establish whether potential ordinary shares are dilutive or antidilutive. Appendix A (para. A3) illustrates the consequence: potential ordinary shares that are dilutive against this control number are also included in the other diluted amounts (discontinued operations, total profit or loss), even if they appear antidilutive there.

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

5 questions

• Which statements about the dilution test for potential ordinary shares are correct? More than one answer is possible.L3
• For the year, Estrel SA has a profit from continuing operations attributable to ordinary equity holders of {continuing_earnings} (in euros) and a post-tax loss from discontinued operations of {discontinued_loss}. The weighted average number of ordinary shares is {weighted_shares}. A convertible bond, outstanding all year, would give {conversion_shares} shares and remove interest of {after_tax_interest} after tax. Calculate the incremental earnings per share of the bond, then, after establishing on continuing operations whether it is dilutive, the diluted earnings per share of total profit. Round earnings per share to two decimals (case convention).L4
• Gironde SA reports, for the year, profit from continuing operations of {continuing_earnings} (in euros) attributable to ordinary equity holders, plus the post-tax profit of a discontinued operation of {discontinued_profit}. The entity has {weighted_shares} shares on a weighted average basis. A convertible bond exists all year: {conversion_shares} shares on conversion and {after_tax_interest} of interest removed after tax. Determine the incremental earnings per share of the bond, then, once the dilution test has been made, diluted earnings per share of total profit. Round earnings per share to two decimals (case convention).L4
• For the year, Rhodes SA has a profit attributable to ordinary equity holders of {earnings_ordinary} (in euros) and a weighted average number of shares of {weighted_shares}; all the potential shares below are outstanding all year and dilutive judged against basic earnings alone. In order of issue: a convertible bond (interest removed of {bond_adjustment} after tax, {bond_shares} shares), convertible preference shares (dividends removed of {pref_dividends}, {pref_shares} shares) and options ({option_shares} incremental shares with no effect on the numerator). Calculate the incremental earnings per share of the convertible preference shares, then diluted earnings per share by ranking the instruments by increasing incremental earnings. Round earnings per share to two decimals (case convention).L4
• The Cévennes group reports, for the year, a profit attributable to ordinary equity holders of {earnings_ordinary} (in euros) for a weighted average of {weighted_shares} shares. Three instruments, outstanding all year, are to be examined: convertible preference shares (dividends of {pref_dividends} removed, {pref_shares} shares), options ({option_shares} incremental shares, with no effect on the numerator) and a convertible bond (interest of {bond_adjustment} removed after tax, {bond_shares} shares). Calculate the incremental earnings per share of the convertible preference shares, then diluted earnings per share, the instruments being included by increasing incremental earnings. Round earnings per share to two decimals (case convention).L4