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The if-converted method must be used in computing diluted EPS for all convertible debt instruments. Under the if-converted method, the denominator of the diluted EPS calculation is adjusted to reflect the full number of common shares issuable upon conversion, while (with one exception) the numerator is adjusted to add back interest expense (after-tax) for the period.
In the case of convertible debt that may be settled in any combination of cash or shares at the issuer’s option (referred to as Instrument X), the if-converted method is applied assuming share settlement for EPS purposes.
For convertible debt for which the principal amount is required to be paid in cash upon conversion, and the intrinsic value of the conversion option (the “conversion spread value”) can be paid in cash or shares at the option of the issuer (referred to as Instrument C):
  • the denominator reflects the number of shares for the conversion spread, and
  • interest should not be added back to the numerator in computing diluted EPS for these instruments.
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