Business Glossary

practice of excluding a convertible security in the Earnings Per Share (EPS) computation when the effect would be to increase EPS. This is based on the conservatism principle. In the EPS, numerator interest expense (net of tax) is added back to net income. The denominator is increased by the number of shares the convertible bond would be converted into. If the impact of including the convertible bond increased EPS, an antidilutive effect would exist.

effect on earnings per share assuming conversion of common stock equivalents , when the effect is to increase, rather than decrease, earnings per share. For example, if a convertible bond was converted into common stock, net earnings would increase by the amount of bond interest saved, and the number of shares outstanding would increase by the conversion ratio. If the former (the numerator) divided by the latter (the denominator) resulted in increased earnings per share, the effect of the conversion would be antidilutive. Conservative accounting principles require that earnings per share EPS) not be inflated by antidilutive effects.