1. Defining Anti-Dilution
Potential common shares are considered anti-dilutive if their conversion or exercise would increase earnings per share or decrease loss per share from continuing operations.
 
2. The Enforcement Rule
Accounting standards state that an entity must never include anti-dilutive instruments in its Diluted EPS calculation. The purpose of the disclosure is to warn investors of potential downward adjustments to profitability per share; it is not meant to show potential improvements.
                    Is Individual Instrument Dilutive?
      (Does it lower EPS from Continuing Operations below Basic EPS?)
                        ├── YES --> Include in Diluted EPS.
                        └── NO  --> ANTI-DILUTIVE. Exclude completely.
                                    Diluted EPS = Basic EPS.

3. Sequential Ordering of Multiple Instruments
When an entity has multiple potential common shares outstanding, it cannot evaluate them as a single group. The entity must calculate the individual dilution drop for each instrument separately.
The instruments are then ranked from the most dilutive to the least dilutive. They are added to the Diluted EPS calculation sequentially, step-by-step, until an option or conversion increases the running EPS figure, at which point all remaining anti-dilutive instruments are excluded.
 
PreviousNext