In short
The if-converted method measures the dilution from convertible securities for diluted earnings per share by assuming conversion at the start of the period (or at issuance, if later).
Key takeaways
- For convertible bonds, add back the after-tax interest to the numerator and add the conversion shares to the denominator.
- For convertible preferred stock, add back the preferred dividends deducted for basic earnings per share.
- Include the security only if it reduces earnings per share.
Where it's tested
FAR: Equity & Earnings Per Share — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company has net income of $600,000 and paid $50,000 in dividends on cumulative preferred stock during the year, none of which were declared. What amount should be used as the numerator for basic EPS?