Financial Reporting · Ind AS 33 Earnings per Share

Diluted Earnings per Share (Ind AS 33) for CA Final

Q: What is the difference between basic and diluted EPS under Ind AS 33?

Basic EPS uses only ordinary shares actually outstanding. Diluted EPS also assumes that dilutive potential ordinary shares, such as options and convertibles, have been converted. It adjusts both profit and share count, so it shows the possible fall in earnings per share.

Q: How do I decide the order of dilution?

Compute earnings per incremental share for each instrument, which is the post-tax earnings adjustment divided by the extra shares. Rank from lowest to highest. Add them one at a time and stop when the running EPS would rise.

Q: How are options and warrants treated in diluted EPS?

Use the treasury share method. Incremental shares equal the number of options times (average fair value minus exercise price) divided by average fair value. They are dilutive only when the exercise price is below average market price, and they have no earnings adjustment.

Q: How do convertible debentures affect diluted EPS?

Add back interest on the debentures, net of tax, to profit. Add the shares that would be issued on conversion to the denominator, from the start of the year or the issue date if later. Keep them only if they reduce EPS.

Q: Can diluted EPS be higher than basic EPS?

For continuing operations profit, no. Instruments that would raise EPS from continuing operations (or reduce a loss per share) are anti-dilutive and are excluded. So diluted EPS is not higher than basic EPS.

Updated 5 October 2026 · Fact-checked

Diluted EPS under Ind AS 33 shows earnings per share if all dilutive potential ordinary shares, such as options, warrants and convertibles, were converted. Add back their post-tax cost to profit, add the extra shares to the denominator, rank instruments by earnings per incremental share, and include only those that reduce EPS.

Understand Diluted Earnings per Share

Basic EPS uses only shares that exist. But a company may have instruments that can become equity shares later: options, warrants, convertible debentures, convertible preference shares and shares issuable on a condition. These are potential ordinary shares. If they convert, each existing shareholder's slice of profit gets smaller. Diluted EPS shows this risk.

To compute it, you change both parts of the fraction. In the numerator, take profit attributable to ordinary equity holders of the parent and add back what the instrument costs, net of tax. For convertible debentures that is the interest. For convertible preference shares it is the preference dividend, which basic EPS had already deducted. In the denominator, add the shares that would be issued, as if conversion happened at the start of the period, or on the issue date of the instrument if that is later.

Only dilutive instruments count. A potential ordinary share is dilutive when its inclusion reduces EPS (or increases loss per share) from continuing operations. If including it raises EPS, it is anti-dilutive and you leave it out. Diluted EPS can therefore never be higher than basic EPS for profit-making entities.

When there are several instruments, you cannot judge each one alone. You rank them by earnings per incremental share, smallest first, and add them one at a time. You stop when the next one would raise the running diluted EPS. The control number for this test is profit from continuing operations attributable to the parent, after preference dividends.

Options and warrants use the treasury share method. They are dilutive only when the exercise price is below the average market price for the period. The shares issued for no consideration are the difference between shares issued on exercise and shares that the exercise money would buy at average market price. They carry no earnings adjustment, so they rank first. Contingently issuable shares are included only if the condition would be met if the reporting date were the end of the contingency period.

Key rules to remember

Diluted EPS: Diluted EPS = (Profit attributable to ordinary equity holders + post-tax adjustments for dilutive instruments) ÷ (Weighted average ordinary shares + weighted average dilutive potential shares); Profit is that attributable to the parent's ordinary equity holders, as used in basic EPS.
Numerator adjustments: Add back: dividends on dilutive convertible preference shares, interest recognised on dilutive convertible debt (net of tax), and other related income or expense changes (net of tax); Tax effect applies only where the item is tax-deductible. Preference dividends usually have no tax adjustment.
Treasury share method (options and warrants): Incremental shares = N × (Average fair value − Exercise price) ÷ Average fair value; N is the number of options or warrants. Use only when exercise price is below average market price. Earnings adjustment is nil.
Earnings per incremental share: Earnings per incremental share = Post-tax earnings adjustment ÷ Incremental shares on conversion; Rank from lowest to highest. Options and warrants with nil adjustment rank first.
Dilution test: Include an instrument only if running diluted EPS after including it < running EPS before it; Test on continuing operations profit attributable to the parent. Use the same share count for all other income lines.
Timing of inclusion: Convertibles: deemed converted at start of period or issue date, if later; Dilutive potential shares are determined independently for each period presented. The year-to-date figure is not a weighted average of the dilutive shares included in each interim computation.

How to solve Diluted Earnings per Share questions

Use this sequence for any diluted EPS question. It works whether you have one instrument or five.

1Compute basic EPS first: profit attributable to ordinary equity holders (after preference dividends) ÷ weighted average ordinary shares. Note the control number, which is continuing operations profit.
2List every potential ordinary share: options, warrants, convertible debentures, convertible preference shares, contingently issuable shares. Note the date each was issued.
3For options and warrants, check if the exercise price is below average market price. If not, they are anti-dilutive and excluded. If yes, apply the treasury share method.
4For convertibles, compute the numerator effect (interest × (1 − tax rate), or the preference dividend) and the number of shares on conversion, weighted from the later of start of year or issue date.
5Compute earnings per incremental share for each instrument and rank from lowest to highest.
6Add instruments one by one to the basic figures. After each, recompute EPS. Keep the instrument if EPS falls. Stop at the first one that raises EPS, because everything ranked after it is also anti-dilutive.
7Present the last dilutive EPS as diluted EPS, rounded as asked. State which instruments were ignored and why.

Quickest way: Rank-and-run table

When to use it: Use this when the question has two or more instruments and time is short.

Write four columns on your sheet: instrument, earnings adjustment (post-tax), incremental shares, earnings per incremental share.
Fill options first. Their earnings are nil, so they rank first. Do the treasury share calculation in one line.
Fill convertibles. Do tax at the stated rate on interest only.
Start with basic earnings and shares. Add rows in rank order and divide each time. Stop as soon as the result goes up.
Circle the last falling figure as your answer. Mention the excluded instrument in one line for the marks.

Common mistakes in Diluted Earnings per Share

Adding back interest without deducting tax.
Students focus on the share count and treat the add-back as the full interest figure.
Fix: Always compute interest × (1 − tax rate) for debentures. Do not apply tax to preference dividends unless the question states a tax effect.
Using all options as extra shares instead of the treasury share method.
Students assume every option converts into a full share.
Fix: Use N × (Average fair value − Exercise price) ÷ Average fair value. Only the free portion is added.
Including anti-dilutive instruments because they look like they should dilute.
A convertible with a high dividend per share looks dilutive because it adds shares, but it raises EPS.
Fix: Rank by earnings per incremental share and test sequentially. Drop any instrument that raises the running EPS.
Ranking by size of the instrument or by number of shares.
Students include instruments in the order given in the question.
Fix: Rank only by earnings per incremental share, lowest first. Options with nil adjustment come first.
Double counting the preference dividend.
Basic EPS already deducts it, so students deduct again or forget to add it back.
Fix: For convertible preference shares, basic profit is after the dividend. In diluted EPS, add the dividend back and add the conversion shares.
Counting full-year shares for an instrument issued part-way through the year.
Students ignore the issue date.
Fix: Weight the incremental shares from the issue date to the year end. For example, shares from an instrument issued on 1 October carry 6/12 weight for a March year end.

Worked examples

Example 1

For the year, Zenith Ltd has profit attributable to equity holders of ₹10,00,000 and 2,00,000 weighted average equity shares. It has 50,000 share options outstanding all year, exercisable at ₹40 each. The average fair value of an equity share during the year was ₹50. Compute basic and diluted EPS.

Show the solution

Basic EPS = ₹10,00,000 ÷ 2,00,000 = ₹5.00.
Exercise price ₹40 is below average fair value ₹50, so the options are potentially dilutive.
Incremental shares = 50,000 × (50 − 40) ÷ 50 = 10,000 shares.
The options carry no earnings adjustment, so the numerator stays ₹10,00,000.
Diluted shares = 2,00,000 + 10,000 = 2,10,000.
Diluted EPS = ₹10,00,000 ÷ 2,10,000 = ₹4.76 (4.7619). This is lower than basic EPS, so the options are dilutive.

Answer: Basic EPS is ₹5.00 and diluted EPS is ₹4.76.

Example 2

Meridian Ltd has profit after tax of ₹12,48,000. It has 3,00,000 weighted average equity shares. Other facts: (a) 12% convertible preference shares of ₹4,00,000, dividend ₹48,000 for the year, convertible into 10,000 equity shares; (b) 10% convertible debentures of ₹5,00,000 convertible into 25,000 equity shares, tax rate 25%; (c) 30,000 options at exercise price ₹30, average fair value ₹40. All instruments were outstanding the whole year. There are no discontinued operations. Compute basic and diluted EPS.

Show the solution

Profit attributable to equity holders = 12,48,000 − 48,000 preference dividend = ₹12,00,000. Basic EPS = 12,00,000 ÷ 3,00,000 = ₹4.00.
Options: incremental shares = 30,000 × (40 − 30) ÷ 40 = 7,500. Earnings adjustment nil. Earnings per incremental share = ₹0.
Debentures: interest = 10% × 5,00,000 = ₹50,000. After tax at 25% = ₹37,500. Incremental shares 25,000. Earnings per incremental share = 37,500 ÷ 25,000 = ₹1.50.
Preference shares: add back dividend ₹48,000 for 10,000 shares. Earnings per incremental share = ₹4.80.
Ranking: options (0), debentures (1.50), preference shares (4.80).
Step 1, add options: 12,00,000 ÷ 3,07,500 = ₹3.90. This is lower than 4.00, so dilutive.
Step 2, add debentures: (12,00,000 + 37,500) ÷ (3,07,500 + 25,000) = 12,37,500 ÷ 3,32,500 = ₹3.72. This is lower than 3.90, so dilutive.
Step 3, add preference shares: (12,37,500 + 48,000) ÷ (3,32,500 + 10,000) = 12,85,500 ÷ 3,42,500 = ₹3.75. This is higher than 3.72, so anti-dilutive and excluded.

Answer: Basic EPS is ₹4.00. Diluted EPS is ₹3.72, including the options and debentures. The convertible preference shares are anti-dilutive and are ignored.

Exam tips

In written answers, show the ranking table. Examiners give marks for the earnings per incremental share column even if a later figure slips.
State the dilution test in words: an instrument is included only if it reduces EPS from continuing operations. One sentence earns a mark.
In case-scenario MCQs, check the exercise price against average market price first. If the price is higher, the answer is usually that the options have no effect.
Read dates closely. If an instrument was issued mid-year, weight the incremental shares from that date, and say so in your working.
Keep the preference dividend logic straight. Basic EPS deducts it. Diluted EPS adds it back when the convertible preference shares are dilutive.

Practice questions from Ind AS 33 Earnings per Share

Diluted Earnings per Share in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Diluted Earnings per Share: frequently asked questions

What is the difference between basic and diluted EPS under Ind AS 33?

Basic EPS uses only ordinary shares actually outstanding. Diluted EPS also assumes that dilutive potential ordinary shares, such as options and convertibles, have been converted. It adjusts both profit and share count, so it shows the possible fall in earnings per share.

How do I decide the order of dilution?

Compute earnings per incremental share for each instrument, which is the post-tax earnings adjustment divided by the extra shares. Rank from lowest to highest. Add them one at a time and stop when the running EPS would rise.

How are options and warrants treated in diluted EPS?

Use the treasury share method. Incremental shares equal the number of options times (average fair value minus exercise price) divided by average fair value. They are dilutive only when the exercise price is below average market price, and they have no earnings adjustment.

How do convertible debentures affect diluted EPS?

Add back interest on the debentures, net of tax, to profit. Add the shares that would be issued on conversion to the denominator, from the start of the year or the issue date if later. Keep them only if they reduce EPS.

Can diluted EPS be higher than basic EPS?

For continuing operations profit, no. Instruments that would raise EPS from continuing operations (or reduce a loss per share) are anti-dilutive and are excluded. So diluted EPS is not higher than basic EPS.