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Computations of diluted EPS should generally not give effect to any individual class of potential common stock instrument for any period in which its inclusion would have the effect of increasing EPS (or decreasing the loss per share) otherwise computed (i.e., it is anti-dilutive).
Reporting entities use the control number concept to determine whether a potential common stock instrument is dilutive. The control number to be used is income/loss from continuing operations (adjusted for preferred dividends, as described in ASC 260-10-45-20). The control number concept requires that the same number of potentially dilutive securities applied in computing diluted EPS from continuing operations be applied to all other categories of income or loss, even if they would have an anti-dilutive effect on such categories.
For example, if a reporting entity were to report income from continuing operations, a loss from discontinued operations, and a net loss, the number of potential common shares used in the computation of diluted EPS from continuing operations would be used in determining diluted per share amounts of loss from discontinued operations and net loss, although this would result in reduced (or anti-dilutive) reported per share losses for those items.
In determining whether potential common shares are dilutive or anti-dilutive, the reporting entity should consider each issue or series of issues of potential common shares separately, rather than in the aggregate.
To reflect maximum potential dilution, the reporting entity should consider each issue or series of issues of potential common shares in sequence, from the most dilutive to the least dilutive (refer to Example 4 in ASC 260-10-55-57 through ASC 260-10-55-59). That is, dilutive potential common shares with the lowest earnings per incremental share are included in diluted EPS before those with higher earnings per incremental share. It would not be appropriate to simply calculate the impact of all potential common shares in the aggregate to determine if the end result is dilutive to basic EPS (see Example FSP 7-18).
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