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An entity has potential ordinary shares from BOTH convertible debt and options. To rank-test for dilution, Ind AS 33 requires:
ARank potential ordinary shares from MOST dilutive to LEAST dilutive and include each successively in diluted EPS calculation only if it continues to be dilutive (a sequential 'incremental EPS' test)
BApply average market price to all instruments uniformly
CInclude only options
DInclude all in one shot; if total dilution is positive, include all
Answer & Solution
Correct answer: A. Rank potential ordinary shares from MOST dilutive to LEAST dilutive and include each successively in diluted EPS calculation only if it continues to be dilutive (a sequential 'incremental EPS' test)
Each class of potential ordinary share is ranked by its incremental EPS (numerator effect / denominator effect). Add the most dilutive first; if EPS decreases, keep going; stop when adding the next class would INCREASE EPS (anti-dilutive). This sequential test produces the lowest possible diluted EPS.
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