## Diluted EPS under AS 20
### Concept
Diluted EPS measures earnings per share assuming all potential equity shares are converted into actual equity shares. It answers: "What would EPS be if every instrument that could become equity already had?"
$$\text{Diluted EPS} = \frac{\text{Adjusted EAFESH}}{\text{Adjusted WANES}}$$
Diluted EPS is always ≤ Basic EPS (or equal — never higher).
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### Potential Equity Shares and Their Adjustments
| Instrument | Numerator Adjustment | Denominator Adjustment |
|---|---|---|
| Convertible Debentures | Add back: Interest × (1 − Tax Rate) | Add: Shares arising on conversion |
| Convertible Preference Shares | Add back: Preference Dividend | Add: Shares arising on conversion |
| Share Warrants / Options | No adjustment | Add: Incremental shares (net of treasury stock method) |
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### Dilutive vs. Anti-Dilutive
- Dilutive: Including the instrument reduces EPS → include in Diluted EPS.
- Anti-dilutive: Including the instrument increases EPS → exclude from Diluted EPS.
Always test each instrument individually before including it.
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### Negative EPS (Loss Scenario)
When EAFESH is negative, adding potential shares would reduce the loss per share (make it look smaller). This is anti-dilutive — exclude such instruments. Never report a diluted EPS that is less negative than Basic EPS.
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### Multiple Classes of Potential Shares
If there are several dilutive instruments, include them in order from most dilutive to least dilutive (ranked by incremental EPS impact). Stop including once an instrument turns anti-dilutive.