Solution

Year 2017-18

On 31^st March 2018, the period for contingency is not yet over. The condition needs to be satisfied after 1 year after appointment of CFO. Therefore, end of contingency period will be 30^th June 2018. But as on the end of reporting date i.e. 31^st March 2018, the contingent condition, i.e. increase in the market value of the share by 20% (from $ 500 to more than $ 600) is already achieved. Therefore, these shares will be treated as outstanding while calculation of diluted EPS because the provisions say if the effect is dilutive, the calculation of diluted earnings per share is based on the number of ordinary shares that would be issued if the market price at the end of the reporting period were the market price at the end of the contingency period.

The market price at the end of contingent period need to be more than $600. However, that price is already achieved and accordingly the provisions will apply.

However, shall company include the shares in calculation of BASIC EPS as well?

No., since the market price may change in a future period, the calculation of basic earnings per share does not include such contingently issuable ordinary shares until the end of the contingency period because not all necessary conditions have been satisfied. One cannot predict the situation on 30^th June 2018. The share prices may go up or may come down also. Therefore, all the conditions cannot be termed as satisfied and therefore the shares will be included in diluted EPS.

Year 2018-19

On 30^th June 2018, the prices of the shares are $ 610 which are already exceeding the contingent condition. Therefore, all the conditions are satisfied as per the contract. Time as well as price of the shares. Therefore, now the shares will be eligible for calculation of Basic as well Diluted EPS.

When the shares will be actually issued they will be very much part of ordinary shares, and will form of Basic EPS only and not the diluted EPS. So, if the shares are actually issued before the reporting period i.e. 31^st March 2019, then the shares will not be treated for diluted EPS in the year 2018-19.

If the expected market value of the shares is not achieved either on 31^st March or 30th June.

If the expected market value is not achieved, i.e. if the market value is less than $ 600, then the conditions for issues of shares are not satisfied and therefore the shares will neither be part of basic nor of diluted EPS for the years 2017-18 as well as year 2018-19.