Diluted EPS for contingently convertible instruments

Der Fall – die Lösung

1. Introduction

IAS 33 requires entities with publicly-traded shares to disclose basic and, if applicable, diluted EPS. The objective of diluted EPS is to provide information about the potential reduction in EPS arising from the conversion or exercise of convertible instruments, share options and warrants and the issuance of additional ordinary shares upon the satisfaction of specified conditions (IAS 33.5).

In recent years many entities have issued contingently convertible instruments of various types. These instruments have become widespread in the banking and insurance sectors following the global financial crisis because they help to reduce the risk of bankruptcy or insolvency by automatically converting from liabilities into equity in a pre-defined financial stress situation.

This article considers how contingently convertible instruments should be treated when calculating diluted EPS.

2. Issue

IAS 33 refers to two broad categories of instruments that could be ‘dilutive’ and therefore need to be considered for the purpose of diluted EPS. These are:

IAS 33 rules on calculating diluted EPS differ for these two categories....