# 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:

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

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.

Topics

### 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.

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 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 share

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

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.

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.

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

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