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Dear Mike,
This is with reference to F7 Open tuition Notes – Chapter 21 – IAS 33 Earnings per share. I have 2 queries which pertain to Example 3 and Example 5 and I would request your guidance on the same.
Example 3 – For calculating Diluted EPS why is the number of options to be converted to Potential equity shares is taken as the difference i.e. 3,000,000 – 2,400,000 = 600,000 shares? As per my understanding the number of potential equity shares should be 2,400,000 that should be added to the existing equity shares of 4,000,000 for calculating the Diluted EPS. Please advise what I am missing.
Example 5 – The profits from discontinued operations of USD 900,000 is netted off from the post tax Earnings for the year of USD 10 million only during the calculations to find the diluted instruments. Why is it netted off then but not netted off while actually calculating the Basic EPS and the Diluted EPS?
Thanks a lot as always for your assistance and support.
Regards,
The diluting element of options is those shares that are effectively issued free
The 2,400,000 are effectively issued at full market price and they have no adverse effect on the earnings potential of the existing shares
Example 5 … because that’s the rule! That’s the way we have to do it
If you dive it a moment’s thought, those returns from discontinued operations will not come in to future earnings calculations so it’s pointless bringing them in to that working
But those same returns DO affect THIS YEAR’S calculations so we do need to bring them in here for the purposes of calculating the dilution
OK?
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