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Wiley IFRS: Practical Imp lementation Guide and Workbook
during the year. Potential ordinary shares include preference shares convertible into ordinary
shares, share warrants and options, shares that may be issued to employees as part of their remu –
nerati on or as part of other share purchase plans, and contingently issuabl e shares, say on the pur –
chase of an enterprise.
7.2 When calcul ating diluted earnings per share, there will be adjustments to both the "earn ings"
and to the "per share" part of the statistic. If the potential ordinary share has given rise to any
income or expense in the period , then its effec t on profit has to be reversed, as the assumption is
that it has now been con verted into ordinary shares that would not have given rise to that income or
ex pense.
7.3 Thu s the net profit attri butable to ordi nary shareholders is adj usted for the
after-tax
effects of
(a) Preferenc e di vidends on convert ible preference shares
(b) Interest on capital instrument s such as convertible bonds
(c) Other changes in income or expense. For example, the changes in profit in points (a) and
(b) above may mean that employees may recei ve an increase or decre ase in their profits
share due to an employee profit-sharing plan. This must be taken into account in calculat–
ing the net profits used in the diluted earnings per share calculation .
7.4 Dilutive potential shares are deemed to be converted at the beginning of the period or the date
of issue, if a new potential share (dilutive) was issued during the period.
7.5 The conversion rate or exercise price sho uld reflect the most favorable rate or price to the
potenti al ordinary shareholder.
7.6 Potenti al ordinary shares that have lapsed or been cancelled are included for the time they
were outstanding. Potential ord inary shares that wer e converted during the peri od are included in
(a) Diluted earnings per share up to the date of con version
(b) The weight ed-average number or ordinary shares after the date of conve rsion. Thi s latt er
figur e will be then used in calculating both basic earnings per share and diluted earnings
per share.
7.8 Cont ingentl y issuable ordi nary shares are included in the calcul ation of diluted earnings per
share from the beginn ing of the per iod or the date of the contingency agreement (if later) if the
conditions have been me t. In the basic earnings per share calculation, these shares are included
from the date the conditions are met, not the beginn ing of the period/d ate for contingency
agreement.
7.9 Potenti al ordinary shares issued by a subs idiary, associate, or joint venture of the enterprise
can have a dilutive effect on the earnings per share of the reporting enterprise and mu st be refle cted
in the calcul ation. For example, a subsidiary may have share wa rra nts that can be exercised to pur–
chase shares in the subsidiary . Exerci se of the share warrants may change the minority interest in
the subsidiary and hence the profit attributable to the minority interest. Thu s the consolidated profit
attributable to the ordinary shareholders will change with the result ant effec t on the diluted earn –
ings per share calculation.
Case Study 4
Facts
Entity A has made a net profit attributable to ordinary shareholder s of $2 million for the year to Decem–
ber3l, 20X
I.
Ten million ordinary shares were outstanding for the entire year. Since January 20XO there has been
$800,000 of 5% convertible loan stock in issue. The terms of conversion are for every $100 nominal
value of stock.
On June 30, 20XI
120 ordinary shares
June 30, 20X2
150 ordinary shares
June 30, 20X3
140 ordinary shares
Assume that interest on loan stock is allowable for tax relief at 30%.