A company is deemed to have a complex capital structure if it has outstanding potentially dilutive securities such As convertible securities, options, warrants, or other stock issue agreements. A company having a complex capital structure has to give a dual presentation of Earnings Per Share if the aggregate dilutive effect of convertible arid other securities is more than 3 percent.
Dual presentation of complex capital structure
Such a dual presentation is to be effected with equal prominence on the income statement and show:
- Primary EPS.
- Fully diluted EPS.
Primary EPS
Primary EPS is the number of earnings attributable to each share of common stock outstanding plus dilutive Common Stock Equivalents (CSE).
Computation of Primary EPS: Primary EPS = {Net income – Preferred dividend + Tax benefit} / {A Share outstanding + Convertible preferred share & dividend}
The computation is based on the assumption that convertible securities that are Common Stock Equivalent were converted at the beginning of the period (or at the time of existence, if later).
Fully Diluted EPS
Fully dilutive EPS is designed to show the maximum potential dilution of current EPS on a prospective basis. Fully diluted EPS is the number of current EPS reflecting the maximum dilution that would have resulted from conversions of all convertible securities, whether they are Common Stock Equivalent or not, as long as they are dilutive.
When Required
Fully diluted EPS data are required for each period presented, and if shares of common stock,
- Was issued during the period on conversions, exercise, and so on.
- Were contingently issuable at the close of any period presented, and if primary EPS for such period would have been affected had Such actual issuances taken place at the beginning of the period.
Computation of Fully Diluted EPS
The computation should be based on the assumption that all such issued and issuable shares were outstanding from the beginning of the period (or from the time the contingency arose, if after the beginning of the period.
Interest charges applicable to convertible securities and nondiscretionary adjustments that would have been made to items based on net income or income before taxes, such as profit-sharing expense, certain royalties, and investment credit, or preferred dividends applicable to the convertible securities should be taken into account in determining the balance of income appropriate to common stock.