The order in which to include the dilutive instruments is therefore:
(1) Options
(2) 5% convertible bonds
(3) Convertible preference shares
Calculation of Diluted Earnings per Share
     Profit from continuing operations attributable to ordinary equity holders of the parent entity (control number)    Ordinary shares    Per share    
     CU         CU    
As reported    10,000,000    2,000,000    5.00    
Options    -    20,000          
     10,000,000    2,020,000    4.95    Dilutive
5% convertible bonds    3,000,000    2,000,000          
     13,000,000    4,020,000    3.23    Dilutive
Convertible preference shares    6,400,000    1,600,000          
     19,400,000    5,620,000    3.45    Antidilutive

Because diluted earnings per share is increased when taking the convertible preference shares into account (from CU3.23 to CU3.45), the convertible preference shares are antidilutive and are ignored in the calculation of diluted earnings per share. Therefore, diluted earnings per share for profit from continuing operations is CU3.23:
     Basic EPS         Diluted EPS    
     CU         CU    
Profit from continuing operations attributable to ordinary equity holders of the parent entity    5.00         3.23    
Loss from discontinuing operations attributable to ordinary equity holders of the parent entity    (2.00)    (a)    (0.99)    [(b)]
Profit attributable to ordinary equity holders of the parent entity    3.00    (c)    2.24    (d)
(a)(CU4,000,000)÷2,000,000 = (CU2.00)

(b) (CU4,000,000)÷4,020,000 = (CU0.99)

(c) CU6,000,000÷2,000,000 = CU3.00

(d) (CU6,000,000 + CU3,000,000)÷4,020,000 = CU2.24

Example 10 - Instruments of a Subsidiary: Calculation of Basic and Diluted Earnings per Share [7]
Reference: IAS 33, paragraphs 40, A11 and A12
7 This example does not illustrate the classification of the components of convertible financial instruments as liabilities and equity or the classification of related interest and dividends as expenses and equity as required by IAS 32.
Parent:
Profit attributable to ordinary equity holders of the parent entity    CU12,000 (excluding any earnings of, or dividends paid by, the subsidiary)
Ordinary shares outstanding    10,000
Instruments of subsidiary owned by the parent    800 ordinary shares
     30 warrants exercisable to purchase ordinary shares of subsidiary
     300 convertible preference shares
Subsidiary:
Profit    CU5,400
Ordinary shares outstanding    1,000
Warrants    150, exercisable to purchase ordinary shares of the subsidiary
Exercise price    CU10
Average market price of one ordinary share    CU20
Convertible preference shares    400, each convertible into one ordinary share
Dividends on preference shares    CU1 per share

No inter-company eliminations or adjustments were necessary except for dividends.
For the purposes of this illustration, income taxes have been ignored.
Subsidiary's earnings per share
Basic EPS    CU5.00    calculated:    CU5,400 (a) - CU400 (b)
               1,000 (c)
                
Diluted EPS    CU3.66    calculated:    CU5,400 (d)
            (1,000 + 75 (e) + 400 (f))
(a) Subsidiary's profit attributable to ordinary equity holders.

(b) Dividends paid by subsidiary on convertible preference shares.

(c) Subsidiary's ordinary shares outstanding.

(d) Subsidiary's profit attributable to ordinary equity holders (CU5,000) increased by CU400 preference dividends for the purpose of calculating diluted earnings per share.

(e) Incremental shares from warrants, calculated: [(CU20-CU10) ÷ CU20]×150.

(f) Subsidiary's ordinary shares assumed outstanding from conversion of convertible preference shares, calculated: 400 convertible preference shares × conversion factor of 1.

Consolidated earnings per share
Basic EPS    CU1.63    calculated:    CU12,000(g) + CU4,300 (h)
            10,000 (i)
                
Diluted EPS    CU1.61    calculated:    CU12,000 + CU2,928 (j) + CU55 (k) + CU1,098 (l)
            10,000
(g) Parent's profit attributable to ordinary equity holders of the parent entity.

(h) Portion of subsidiary's profit to be included in consolidated basic earnings per share, calculated: (800×CU5.00) + (300×CU1.00).

(i) Parent's ordinary shares outstanding.

(j) Parent's proportionate interest in subsidiary's earnings attributable to ordinary shares, calculated: (800 ÷ 1,000)×(1,000 shares×CU3.66 per share).

(k) Parent's proportionate interest in subsidiary's earnings attributable to warrants, calculated: (30 ÷ 150)×(75 incremental shares×CU3.66 per share).

(l) Parent's proportionate interest in subsidiary's earnings attributable to convertible preference shares, calculated: (300 ÷ 400)×(400 shares from conversion×CU3.66 per share).

Example 11 - Participating Equity Instruments and Two-class Ordinary Shares [8]
Reference: IAS 33, paragraphs A13 and A14
8 This example does not illustrate the classification of the components of convertible financial instruments as liabilities and equity or the classification of related interest and dividends as expenses and equity as required by IAS 32.
Profit attributable to equity holders of the parent entity    CU100,000
Ordinary shares outstanding    10,000
Non-convertible preference shares    6,000
Non-cumulative annual dividend on preference shares (before any dividend is paid on ordinary shares)    CU5.50 per share

After ordinary shares have been paid a dividend of CU2.10 per share, the preference shares participate in any additional dividends on a 20:80 ratio with ordinary shares (ie after preference and ordinary shares have been paid dividends of CU5.50 and CU2.10 per share, respectively, preference shares participate in any additional dividends at a rate of one-fourth of the amount paid to ordinary shares on a per-share basis).
Dividends on preference shares paid    CU33,000    (CU5.50 per share)
Dividends on ordinary shares paid    CU21,000    (CU2.10 per share)
Basic earnings per share is calculated as follows:
      CU    CU
Profit attributable to equity holders of the parent entity         100,000
Less dividends paid:          
Preference    33,000    
Ordinary    21,000    
           (54,000)
Undistributed earnings          46,000
Allocation of undistributed earnings:
Allocation per ordinary share    = A
Allocation per preference share    = B; B = 1/4 A
     (A 10,000) + (1/4 A 6,000) = CU46,000
     A = CU46,000 ÷ (10,000 + 1,500)
     A = CU4.00
     B = 1/4 A
     B = CU1.00
Basic per share amounts:
     Preference shares    Ordinary shares
Distributed earnings    CU5.50    CU2.10
Undistributed earnings    CU1.00    CU4.00
Totals    CU6.50    CU6.10

Example 12 - Calculation of Basic and Diluted Earnings per Share and Income Statement Presentation (Comprehensive Example) [9]
This example illustrates the quarterly and annual calculations of basic and diluted earnings per share in the year 20X1 for Company A, which has a complex capital structure. The control number is profit or loss from continuing operations attributable to the parent entity. Other facts assumed are as follows:
9 This example does not illustrate the classification of the components of convertible financial instruments as liabilities and equity or the classification of related interest and dividends as expenses and equity as required by IAS 32.

Average market price of ordinary shares:The average market prices of ordinary shares for the calendar year 20X1 were as follows:
First quarter    CU49
Second quarter    CU60
Third quarter    CU67
Fourth quarter    CU67
The average market price of ordinary shares from 1 July to 1 September 20X1 was CU65.
Ordinary shares: The number of ordinary shares outstanding at the beginning of 20X1 was 5,000,000. On 1 March 20X1, 200,000 ordinary shares were issued for cash.
Convertible bonds: In the last quarter of 20X0, 5 per cent convertible bonds with a principal amount of CU12,000,000 due in 20 years were sold for cash at CU1,000 (par). Interest is payable twice a year, on 1 November and 1 May. Each CU1,000 bond is convertible into 40 ordinary shares. No bonds were converted in 20X0. The entire issue was converted on 1 April 20X1 because the issue was called by Company A.

Convertible preference shares: In the second quarter of 20X0, 800,000 convertible preference shares were issued for assets in a purchase transaction. The quarterly dividend on each convertible preference share is CU0.05, payable at the end of the quarter for shares outstanding at that date. Each share is convertible into one ordinary share. Holders of 600,000 convertible preference shares converted their preference shares into ordinary shares on 1 June 20X1.
Warrants: Warrants to buy 600,000 ordinary shares at CU55 per share for a period of five years were issued on 1 January 20X1. All outstanding warrants were exercised on 1 September 20X1.
Options: Options to buy 1,500,000 ordinary shares at CU75 per share for a period of 10 years were issued on 1 July 20X1. No options were exercised during 20X1 because the exercise price of the options exceeded the market price of the ordinary shares.