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If-converted method belongs in a reconciled numerator-and-denominator workpaper. The if-converted method assumes conversion at the beginning of the period, or issuance date if later. It adds conversion shares to the denominator and reverses numerator amounts that conversion would avoid, such as after-tax interest or preferred dividends.
Apply it
Convertible debt would add 120,000 shares and avoid $240,000 of interest at a 25 percent tax rate. The numerator increases by $180,000 and the denominator by 120,000, giving incremental EPS of $1.50.
Review if-converted method against potential common shares. Reconcile if-converted method to incremental earnings per share, the dated if-converted method evidence, and its final presentation.
The if-converted method record ties potential common shares to its source date, measured amount, and incremental earnings per share effect.
Keep the boundary clear
Use the instrument's conversion ratio, dates, tax effect, and income consequences. Conversion is excluded when its combined effect is antidilutive.
Authority
Read ASC 260-10-45-40 for the if-converted method.
Put the concept to work
Apply this concept
- Explain and apply if-converted method within a reconciled numerator-and-denominator workpaper using supplied authoritative facts.
Learning resources
Choose a lesson, try an application, or inspect the sources behind this concept.
Build on these ideas
- Potential common shares — Apply
To apply this concept: Required. This earlier step supplies an input required by the EPS workpaper.