What are the three possible methods for reporting EPS when warrants and convertibles are outstanding?

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What are the three possible methods for reporting EPS when warrants and convertibles are outstanding?

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What are the three possible methods for reporting EPS when warrants and convertibles are outstanding?

Explanation & AnswerSolution by a verified expert

Explanation

Basic EPS is computed by dividing the net income attributable to common shareholders by the weighted average number of shares outstanding, without consideration of the warrants, convertibles, and other potential diluters.
Diluted EPS is computed by adjusting the net income attributable to common shareholders and the weighted average number of shares with the assumption that all warrants, convertibles, and other potential diluters are exercised.
For example, a warrant once exercised will increase the weighted average number of shares, while a convertible bond if converted will increase both net income (by reduced interest expense) and the weighted average number of shares.

Verified Answer

Companies with outstanding warrants or convertibles may report their EPS either as:

Basic EPS, where warrants or convertibles are ignored
Diluted EPS, where all warrants or convertibles are assumed to be exercised

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