The issuance of these shares has a substantial effect on the company`s earnings per share (EPS). From an accounting perspective, potential issuance agreements are similar to earnings-based stock option plans, due to some uncertainty about the number of shares that could be issued. The shares to be issued should be considered as being in the process of calculating the primary and fully diluted earnings per share. However, the calculation of earnings per share should also reflect agreed performance standards. Company A decides to acquire Company B. As a result, Company A and Company A enter into a conditional issuance agreement. This conditional expense agreement is the result of a negotiation between Company A and Company B. Conditionally issued shares are shares issued at a future date, subject to compliance with the conditions. Conditions can be related to earnings, the market price of stocks, or something else. Although conditional shares are another example of potential ordinary shares, they are sometimes taken into account in the calculation of the basic PES (see section The following sections examine the impact of conditional actions on diluted EPS.

As the name suggests, contingency agreements usually occur when negotiations between the parties result in an agreement on a problem. The contract between these parties then becomes an “if-if”, with regard to how one party treats the other. This type of contract can be the result between companies if one acquires another. For example, the acquiring company may agree to issue additional common shares to shareholders of the acquired company if the value of the shares of the acquired company exceeds a specified threshold during a given period. So, here`s what earnings per share = (net earnings / outstanding shares + conditional shares) = ($800,000 / 100,000 + 50,000) = $5.33 per share. This is a diluted EPS for 2014. Note that conditional shares are not always issued. If two parties do not agree on the terms of the mergers/acquisitions, only the conditional shares are issues (i.e.

if the conditions set are met, such as a predetermined market price or net profit for a given period). In the event of a merger and acquisition, a conditional share agreement would be signed. In the case of mergers and acquisitions, the entity is not entitled to acquire new ordinary shares for the acquired company if certain conditions are met. Now let`s assume that Company B can achieve the goal of a 20% increase in yields this year. This means that Company A will issue 20,000 ordinary shares in conditional shares. Let`s go back to Company A & Company B. Suppose they have signed a conditional issuance agreement. In accordance with the agreement, Company A, if Company B earns a certain amount, will benefit the shareholders of Company B by issuing a certain number of common shares.

These actions are called conditional actions. Both parties must agree with these two factors. And this leads to the additional issuance of shares if the condition(s) are met. If the words “if and after” work, the acquiring company issues new shares for the shareholders of the acquired company. As a result, the number of shares of the acquired companies increases. However, an additional 20,000 common shares will proportionately dilute existing shareholders prior to the issuance of the new shares [contingeny]. And to calculate the new earnings per share, we will use the new number of shares in progress. . . .