Accounting standards 20

It simply means that if a company's all potential equity shares are actually equity shares, what would be EPS then.

And, potential equity shares are those instruments which will be converted in equity shares in future.

e.g. convertible debentures, convertible pref. shares.

According to AS 20, "For the purpose of calculating diluted earnings per share, the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period should be adjusted for the effects of all dilutive potential equity shares."

In simple terms, Diluted EPS takes one step further to Basic EPS. Basic EPS takes into account only the outstanding shares at that period of time. Whereas, Diluted EPS estimates how many shares could theoretically exist after all the Share warrents, Convertibles Bonds, Convertible Debentures, Warrants etc have been exercised.