Dilution

IAS 33 Definition: Dilution is a reduction in earnings per share or an increase in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.

IAS 33 Definition: Anti-dilution is an increase in earnings per share or a reduction in loss per share resulting from the assumption that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.


Dilution is the term investors are focussing on, it decreases their potential income unless the entity issuing shares is able to earn the same return as they did with the undiluted shares. Off course antidilution is also important but many (if not most) investors are defensive, do not want to lose money.

Dilution calculations:

The diluted EPS formula:

Dilution


Example calculation (it is about the mechanics, not the numbers!):

CU ‘000

20×7

20×6

Revenue

18,643

16,643

Cost of sales

13,050

11,817

Gross margin

5,593

4,826

Sales, general and administrative expenses

4,755

4,295

Operating result, profit

838

531

Tax expense

210

133

Net income attributable to owners

628

398

Preferred dividend paid

50

35

Shares and options

Founder shares

20

20

Basic shares

250

200

Diluted shares

330 1

345

Fully diluted

360 2

375

Employee option schedule (20×7)

Strike price

In -the- money3

Current price

# of options

Options in-the-money

10

Yes

9

50

50

10

Yes

9

30

30

15

No

9

20

Total options

100

80

Calculations

The average number of shares

Type of shares / options

Outcome

Calculation

Founder shares

20

= (20 + 20) / 2

Basic shares

225

= (250 4 + 200 5) / 2

Diluted basis

85

= (80 + 90) / 2

Fully diluted

118

= (110 + 125) / 2

Something else -   Assets as an element of financial statements

Earnings per share

Type of shares / options

Outcome

Calculation

Founder EPS

2.50

= 506 / 207

Basic EPS

2.57

= (6288 – 509) / 22510

Diluted EPS

1.75

= (628 – 50) / 33011

Fully EPS

1.61

= (628 – 50) / 36012

The table and the calculation method shows the potentially arbitrary outcome of these type of presentations. However it should be noted that a listed entity has (or should have) a lot of market date available to substantiate the different inputs.

Disclosure examples

Here are a few examples of dilution disclosures in the notes to the financial statements:

13. Equity-method investments13

BAIC Motor
BAIC Motor Corporation Ltd. (BAIC Motor) is the passenger car division of BAIC Group, one of the leading automotive companies in China. Directly or via subsidiaries, BAIC Motor is engaged in the business of researching, developing, manufacturing, selling, marketing and servicing automotive vehicles and related parts and components and all related services. Due to Daimler’s representation on the board of directors of BAIC Motor and other contractual arrangements, Daimler classifies this investment as an investment in an associate, to be accounted for using the equity method; in the segment reporting, the investment’s carrying amount and its proportionate share of profit or loss are presented in the reconciliation of total segment’s assets to Group assets and total segments’ EBIT to Group EBIT, respectively.

On May 3, 2018, BAIC Motor issued new shares at the Hong Kong Stock Exchange. As a result, Daimler’s interest in BAIC Motor was diluted from 10.08% to 9.55%. The dilution did not lead to any material earnings effects at Daimler. Daimler continues to exercise significant influence on BAIC Motor.

Something else -   Instruments that failed the SPPI test

Further remuneration information14

Dilution

All awards are made under plans that incorporate dilution limits as set out in the guidelines for share incentive schemes published by the Investment Association. The current estimated dilution from subsisting executive awards, including the planned June 2018 awards, is approximately 2.7% of the Company’s share capital at 31 March 2018 (2.9% at 31 March 2017), whilst from all-employee share awards it is approximately 0.4% (0.3% at 31 March 2017). This gives a total dilution of 3.1% (3.2% at 31 March 2017).

14.1 Income for the period – Equity holders of Air France – KLM per share15

Reconciliation of income used to calculate earnings per share

The results used to calculate earnings per share are as follows:

— Results used for the calculation of basic earnings per share

Dilution

The earnings per share before dilution (basic earnings per share) corresponds to the net result divided by the weighted average number of shares in circulation during the financial year, excluding the weighted average number of treasury shares.

Something else -   IAS 41 Agricultural activity

Dilution

For the calculation of the diluted earnings per share, the weighted average number of shares in circulation is adjusted for the potential dilutive effect of all equity instruments issued by the Group, in particular stock option plans and performance shares. The dilution resulting from the exercise of stock option plans and performance shares is based on the IAS 33 methodology. Since the perpetual subordinated loan is considered to be preferred shares, the coupons are included in basic earnings per share.

Dilution

The change in the number of ordinary shares issued is disclosed in Note 28.1.

14.2 Non- dilutive instruments

The Air France – KLM Group held no non- dilutive instruments as of December 31, 2018.

14.3 Instruments issued after the closing date

No instruments were issued subsequent to the closing date.

Dilution

Dilution Dilution

Dilution Dilution Dilution Dilution Dilution Dilution

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Something else -   IAS 41 Agricultural activity

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