19.3 Other Issues

Convertible securities and other dilutive instruments are not always outstanding throughout the entire current reporting period. They can also be issued or converted during the current reporting period. These transactions can affect both basic and diluted EPS. Below are some different examples of convertible securities and other issues that can have an impact on the calculations for basic EPS or diluted EPS.

Type of Security and Description Effect on EPS of Transaction

Convertible security or option is issued during the reporting period. Basic EPS: If the security is preferred shares, the dividend entitlement (cumulative) or dividend declared (non-cumulative) will be subtracted from net income.
Diluted EPS: Income and shares effects are prorated to reflect the duration from the issuance date of the convertible security to the end of the reporting period.

Convertible security or option is converted to common shares during the reporting period. Basic EPS: The common shares issued will be included in the WACS calculation from the date of conversion to the end of the reporting period.
Diluted EPS: Income and shares effects are prorated from the date that the security was converted backwards to the beginning of the reporting period. The shares issued for the actual conversion are already included in the basic EPS calculation.

Convertible security or option is either redeemed or its conversion rights expire during the reporting period. Basic EPS: There is no effect regarding the redemption or expiration of conversion rights.

Diluted EPS: If dilutive, the income and shares effects are prorated to reflect the duration from the beginning of the reporting period to the redemption or expiry date. For options, the shares effect would be prorated for any period during the current reporting period that they were in the money.

Convertible security has more than one conversion point in time. Diluted EPS will be included in the diluted EPS calculation using the most dilutive alternative.

Convertible security cannot be converted until some future point in time. Diluted EPS will be included in the diluted EPS calculations, if dilutive.

Convertible debt such as bonds issued at a discount or premium. Diluted EPS will use the effective interest method to determine the income effect regarding the income expense saved.

Options that are repurchased from option holders by the company (of its own shares). Diluted EPS will be excluded from the diluted EPS because the company would not purchase the options if it were not favourable for them to do so.

A company with a net loss from continuing operations. Diluted EPS will be equal to basic EPS because the individual income and shares effects for the diluted calculations will result in a reduction in the net loss from continuing operations and will, hence, be anti-dilutive.