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Calculation of diluted eps

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Kanika Maheshwari

Article Assistant

125 Points Posted on 29 January 2016

A company is in the business of manufacturing textiles. It has taken a long-term debt from a bank. As per the agreement with the bank, in case the company did not pay interest or repayments on time then the bank shall have an option to convert the outstanding amount into equity shares of the company (conversion at par value). Till date the company has not made any default. Whether the loan get covered under the definition of potential equity shares and, accordingly, does the company need to disclose 'Diluted Earnings Per Share (EPS)' as required by AS 20 ?

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Varun

Article Assistant

41 Points Posted on 29 January 2016

Yes, from the AS 20 perspective, this should be treated as contingent equity shares and should be included while calculating the Diluted Earnings Per Share in accordance with AS 20.

Para 7 of AS 20 for Ready Reference
Examples of potential equity shares are:

(a) debt instruments or preference shares, that are convertible into equity shares;
(b) share warrants;
(c) options including employee stock option plans under which employees of an enterprise are entitled to receive equity shares as part of their remuneration and other similar plans; and
(d) shares which would be issued upon the satisfaction of certain conditions resulting from contractual arrangements (contingently issuable shares), such as the acquisition of a business or other assets, or shares issuable under a loan contract upon default of payment of principal or interest, if the contract so provides.