Final answer:
To calculate the impact of share options and convertible bonds on EPS for a public company, one would use the treasury stock method for options and the if-converted method for convertible bonds. Basic EPS is computed using the net income divided by the weighted average number of shares, while diluted EPS factors in potential conversions of options and bonds. These calculations are manual and need to be carefully reported according to accounting standards like IFRS or GAAP.
Step-by-step explanation:
The calculation of basic and diluted Earnings Per Share (EPS) is crucial in assessing the value of a public company's stock. The basic EPS calculation takes into account the net income of a company (generally after dividends on preferred stock) divided by the weighted average number of common shares outstanding during the period. Diluted EPS, on the other hand, includes the potential impact of securities that could potentially be converted into common stock, such as share options and convertible bonds, which could increase the number of shares outstanding.
To calculate the impact of share options and convertible bonds on diluted EPS, one must use the treasury stock method for options and the if-converted method for convertible bonds. The treasury stock method assumes that the company uses the proceeds from the exercise of share options to repurchase shares at the average market price, thus reducing the increase in shares from the options. Meanwhile, the if-converted method assumes that the convertible securities have been converted into common stock at the beginning of the period or at the time of issuance if later.
Manually calculating the impact involves a few steps such as: Identifying in-the-money options; calculating additional shares from options using the treasury stock method; adding the shares from assumed conversions of convertible bonds; and recalculating the diluted EPS with the adjusted number of shares. These calculations are significant for investors and need to be adequately reported in the company's financial statements in compliance with applicable financial reporting standards, such as the International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP).